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Petitioner: Messrs TELENOR PAKISTAN (PVT.) LTD. VS Respondent: APPELLATE TRIBUNAL INLAND JUDGMENT
Court Name: Islamabad High Court Judge(s): Athar Minallah, Noor-Ul-Haq N. Qureshi Title:Messrs TELENOR PAKISTAN (PVT.) LTD. vs APPELLATE TRIBUNAL INLAND
JUDGMENT
Reported As: 2017 PTD 1181 Result: Case remanded Judgment JUDGMENT ' ATHAR MINALLAH, J.---Through this consolidated judgment we shall decide the references listed in Annexure-A attached hereto. We have divided the References into three categories because the respective judgments rendered by the learned Appellate Tribunal Inland Revenue (hereinafter referred to as the 'Tribunal') are distinct. References listed under Category 'A' have been filed by the Department, while those under Categories '13' and 'C' were filed by the telecommunication service operators (hereinafter referred to as the "Taxpayers"). The questions of law proposed for our consideration are common in all the References, which relate to the interpretation of subsection (7) of section 148 of the Income Tax Ordinance, 2001 (hereinafter referred to as the 'Ordinance of 2001') and clause (29C) of section 2 ibid. 2. The facts, in brief, are that the Taxpayers are, inter alia, enaged in rendering telecommunication services through telecommunication systems. The taxpayers are licensed to render such services by the Pakistan Telecommunication Authority pursuant to powers conferred under the Pakistan Telecommunication Authority (Re-organization) Act, 1996 (hereinafter referred to as the 'Act of 1996'). In order to render telecommunication services, the Taxpayers use various machines, equipment and materials. The expressions 'Telecommunication Services' and 'intelligence' are defined in clauses (g) and (v) of section 2 of the Act of 1996 respectively. The Federal Government approved the Mobile Cellular Policy and the same was circulated on 28-01-2004. Clause 9 of the policy provides that the telecom sector, .Including the mobile cellular operations, would be classified as an 'industry'. Likewise clause 10 envisages that appropriate changes in the legal and regulatory framework would ensue. Pursuant to the Cabinet's decision, a notification dated 20-04-
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2004 was published in the official gazette, declaring that the Federal Government had been pleased to classify the telecom sector, including cellular operations, as an 'industry'. The Ministry of Information and Technology, vide its recommendations dated 18-06-2014, advised the Federal Board of Revenue to issue a notification in order to give effect to the Cabinet's decision by treating the telecommunication industry, including mobile cellular operations, as 'Industrial undertaking' under section 2(29C) of the Ordinance of 2001. Earlier the Federal Board of Revenue, vide letter dated 01-04-2011, in response to a query raised on behalf of one of the taxpayers, had declared that a telecommunication company providing and rendering telecommunication services are not covered under the definition of 'industrial undertaking' in the context of section 2(29C) of the Ordinance of 2001. It is noted that the said clarification was in relation to the issuances of an exemption certificate under section 153 ibid. The Taxpayers admittedly use machinery and equipment forming part of the telecommunication system in order to render telecommunication services. The Taxpayers file their returns under section 120 of the Ordinance of 2001 for each financial year, and the same are treated as assessment orders. The Taxpayers, from time to time, import materials, plants, machinery and equipment, and pay advance income tax under section 148 of the Ordinance of 2001. Such income tax paid at the import stage is later adjusted by the Taxpayers in their respective returns. The adjustment was challenged by the respective Assessing Officers on the ground that the Taxpayers are not 'industrial undertakings' in the terms of the definition provided under subsection (7) of section 148 of the Ordinance of 2001 and were, therefore, not entitled to adjustment of the income tax paid at the import stage. It would be relevant to briefly refer to the facts in the case of each category. Category 'A' 3. Show-cause notices were issued under section 221 of the Ordinance of 2001 by the Assessing Officer. The latter passed assessm ent orders for the respective tax years under section 122(1) of the Ordinance of 2001. The taxpayer, namely, M/s. C.M. Pak Ltd., filed appeals and the same were allowed by the Commissioner Inland Revenue (Appeals), Large Taxpayers' Unit, Islamabad (hereinafter referred to as the `CR(A)') vide the appellate order dated 15-02-2012. The learned CIR(A) held that the notices issued under section 221 or 122 of the Ordinance of 2001 were ultra wires. Moreover, it was further held that the Taxpayer was entitled to adjust the income tax paid at the import stage since it was not a final tax in the case of the latter. The learned CIR(A), therefore, deleted the tax which had been declared as final tax and directed the Assessing Officer to treat the advance tax adjustable against tax liability due from the taxpayer under the normal tax regime. Appeals were filed before the learned Tribunal and the latter upheld the appellate order of the learned CIR(A) by dismissing the same. The department has filed the References under section 133 of the Ordinance of 2001 proposing the following question of law.--- "Whether in the facts and in the circumstances of the case, the Honourable ATIR was justified to hold that the tax collected at source under section 148 of the Income Tax Ordinance, 2001 is adjustable advance tax, whereas, the taxpayer being a service provider does not qualify to an "industrial undertaking" as provided in section 2(29C) of the Income Tax Ordinance, 2001, hence not entitled for the said adjustment?" Category 'B' 4. The References have been filed by Messrs Telenor Pakistan (Pvt.) Ltd. Show-cause notices relating to different tax years were issued by the respective Assessing Officers under section 122(9) of the Ordinance of 2001 on the sole ground that the Federal Board of Revenue, vide letter dated 01- 04-2011, had declared the telecommunication sector companies providing and rendering telecommunication services as not being covered under the definition of `industrial undertaking' for the purposes of section 148(7) of the Ordinance of 2001. It was also alleged that taxable loss on account of disposal of fixed assets had been claimed and the same were in excess and, therefore, an explanation was sought. The Assessing Officer, vide the respective orders, decided against the
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Taxpayer and, therefore, the latter filed appeals before the CIR(A) but the same did not succeed. The learned CIR(A) dismissed the appeals on the sole ground that the letter dated 01-04-2011, issued by the Federal Board of Revenue, and the circulars, letters or orders of the latter are binding on the field officers. The learned CIR(A), therefore, dismissed the appeals and held that the advance income tax paid by the taxpayer at the import stage was final discharge of tax. The taxpayer preferred appeals and the same were dismissed by the learned Tribunal vide orders dated 05-06-2014 and 26-01-2015. The questions proposed in the References relate to the interpretation of section 148(7) read with section 2(29C) of the Ordinance of 2001. Category 'C' 5. The References have been filed by M/s. Pakistan Telecom Mobile Limited. The Assessing Officer issued show-cause notices under section 122(9) of the Ordinance, 2001 on the sole ground that since the Federal Board of Revenue, vide letter dated 01-04-2011, had declared that the telecommunication companies are not covered under the definition of 'industrial undertaking', therefore, the Taxpayer was not entitled to adjustment of advance tax paid at the import stage. The show-cause notice were decided by the respective Assessing Officers against, the Taxpayer and the latter preferred appeals before the learned CIR(A). The learned CIR(A), vide appellate orders, disposed of the appeals on the sole ground that the Taxpayer was not an 'industrial undertaking' since it had not been successful in having itself declared as such despite making several attempts. It was, therefore, held that the taxpayer was a service company and did not fall within the definition of an industrial undertaking. The taxpayer filed an appeal before the learned Tribunal. A larger Bench of the learned Tribunal was constituted since various Benches of the Tribunal had passed conflicting judgments. The learned Tribunal dismissed the appeals vide consolidated judgment dated 03-08-2016. The Bench drew a distinction between the provisions of section 2(29C) as they existed before and after the amendment made through the Finance Act, 2010. After discussing the phrase 'which is engaged in' in great detail, it was concluded that in order to be treated as an 'industrial undertaking' the entity claiming exemption under section 148(7) had to be simultaneously engaged in all the trades mentioned in sub-clauses (i) to (iv) of clause (a) of section 2(29C). The questions proposed for our consideration relate to the interpretation of sections 148(7) and 2(29C) of the Ordinance of 2001. 6. The learned counsels for the petitioners have argued that; the question proposed by the Department does not arise out of the impugned order passed by the learned Tribunal; the learned Tribunal had not discussed the definition of 'industrial undertaking' provided under section 2(29C) of the Ordinance of 2001; the goods imported by the taxpayer in the instant References are not sold in the market to generate income; the goods imported are used by the taxpayers for the purposes of subjecting material to various processes; reliance is placed on the case of Elahi Cotton Mills Ltd. v. Federation of Pakistan' [PLD 1997 SC 582] in support of the contention that a presumptive tax can only be imposed on items when it is regarded as citizens' income; if no income is being derived from the imports, there can be no question of final tax and any advance payment shall always remain adjustable; in the instant case no income is generated from the sale of the imported goods and there is no question of section 148(7) being applicable and the tax paid under subsection (1) being final; the goods imported by the assessee are exclusively for self use in the course of business and not resale,, and hence tax will be separately charged on the income which is generated by the use of the machine; it is settled law that what cannot in any rational sense be regarded as income cannot conceivably be taxed as income; the position adopted by the department is perverse; the quantum of presumptive income can only be fixed on the basis that the importer is going to earn direct income from the imports; the presumptive tax i,e, final tax regime was introduced purely to capture the untaxed income of commercial importers who were in the business of reselling imported goods; the orders passed by the respective Assessing Officers
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were passed in violation of the principles of natural justice; proper opportunity was not provided to the taxpayers despite the fact that the proposed action was very severe; the power of rectification was of a limited scope and, therefore, the deemed assessment could not have been amended by invoking the said provisions; the learned Assessing Officers have misinterpreted the expression 'industrial undertaking'; the telecommunication services' and 'telecommunication system' are terms defined under the Act of 1996; a plain reading of the said definitions clearly shows that the cellular operators i,e, the taxpayers in the instant References are engaged in the activities described in section 2(29C) of the Ordinance of 2001. 7. On the other hand, the learned counsels appearing for the Department have argued that; the Federal Board of Revenue, vide letter dated 01-04-2011, has unambiguously declared that the telecommunication sector companies providing/rendering telecommunication services to their clients are not covered under the definition of 'industrial undertaking' ; the said letter was not challenged by the taxpayers in the instant Tax References; the larger Bench of the learned Tribunal has correctly interpreted the provisions of section 148(7) read with section 2(29C) of the Ordinance of 2001; the tax paid by the taxpayer at the import stage was a final tax under section 148(7) of the Ordinance of 2001 and the same was not adjustable; the Taxpayers had failed to discharge the onus that they are covered under the expression 'industrial undertaking'. 8. The learned counsels have been heard and the record perused with their able assistance. 9. In all the Tax References the questions of law proposed for our consideration relate to the interpretation of sections 148(7) and section 2(29C) of the Ordinance of 2001. The learned counsel have advanced arguments to this extent only since no other question has been pressed. The questions of law which arise from the judgments rendered by the learned Tribunal are as follows:-- (a) Whether the letter dated 01-04-2011, issued by the Federal Board of Revenue, declaring the entities engaged in providing telecommunication services as not covered under the definition of section 2(29C) is final and binding on the adjudicating forums, and (b) When does a taxpayer become entitled to adjustment of advance tax paid under section 148 of the Ordinance of 2001. (c) Whether the adjudication forums in the case of the instant ' References have adverted to the relevant factual considerations in the context of section 148 read with section 2(29C). 10. In order to answer the above questions it would be beneficial to reproduce the relevant provisions of the Ordinance4 of 2001. 148 Import.--- (7) The tax [required to be] collected under this section shall be a final tax [except as provided under subsection (8)] on the income of the importer arising from the imports subject to subsection (1) and this subsection shall not apply in the case of import of--- (a) raw material, plant, machinery, equipment and parts by an industrial undertaking for its own use; 11. The expression 'industrial undertaking' has been defined in clause (29C) of section 2 of the Ordinance, 2001, the said provision was amended through the Finance Act, 2010. The provisions before the amendment were as follows:--- [(29C) "Industrial undertaking" means--- (a) an undertaking which is set up in Pakistan and which employs, (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy and which is engaged in,---
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(i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; (ii) ship-building (iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic powers, or (iv) the working of any mine, oil-well or any other source of mineral deposits; and any other industrial undertaking which the [Board] may by notification in the official Gazette, specify;] ' After the amendment the provisions that stand enforced today are as follows:-- [(29C) "Industrial undertaking" means--- (a) an undertaking which is set up in Pakistan and which employs; (i) ten or more persons in Pakistan and involves the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; or (ii) twenty or more persons in Pakistan and does not involve the of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal energy; ' and which is engaged in,--- (i) the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; (ii) ship-building; or (iii) generation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic powers; or (iv) the working of any mine, oil-well or any other source of mineral deposits; and ' any other industrial undertaking which the Board may by notification in the official Gazette, specify.] 12. Subsection (1) of section 148 empowers the Collector of Customs to collect advance tax from every importer of goods on the value thereof at the rate specified in Part-II of the First Schedule. Admittedly, the advance tax in collected from and paid by the Taxpayers against all the imports made, as envisaged under section 148. Subsection (7) of section 148 declares that the advance tax collected at the import stage is a final tax. However, the legislature, in its wisdom, has carved out certain exceptions which are described in subsection (7). The exceptions, inter alia cover raw material, plants, machinery, equipment, equipment and parts imported by an 'industrial undertaking' for its own use. In case an entity is able to establish that it meets the conditions specified in section 148(7), read with the definition of an 'industrial undertaking' provided under section 2(29C), then it becomes entitled to claim adjustment since the tax paid under section 148 would not be treated as final tax. 13. The provisions of section 2(29C) relating to the definition of 'industrial undertaking', before and after the amendments made through the Finance Act, 2010, have been reproduced above. A plain reading of the provisions as they existed prior to the amendment shows that various conditions had to be fulfilled in order to be treated as an 'industrial undertaking' for the purposes of subsection (7) of section 148. Sub-clauses (i) to (vi) listed after the expression 'which is engaged in are distinct and separate. The larger Bench of the learned Tribunal has interpreted the said provision in such a manner which leads to an anomalous situation i,e, reading clauses (i,) to (iv) together with the expression 'engaged in' rather than treating them as distinct alternatives. The learned larger Bench of the Tribunal, based on this interpretation, reached the conclusion that in order to be treated as an 'industrial undertaking' an entity had to show that it was simultaneously engaged in all the four different and distinct categories. If this interpretation of the larger Bench of the learned Tribunal is accepted then in order to qualify as an industrial undertaking, an entity would have to show that it is engaged in and covered under all the four clauses i,e, (i) to (iv). The larger Bench of the learned
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Tribunal has not interpreted the clauses as being independent of each other, which has the effect of making it virtually impossible for any undertaking to be treated as an 'industrial undertaking'. It, therefore, givens rise to an absurdity which obviously cannot be attributed to the legislature. Moreover, this interpretation also renders clause (i) as redundant and it is settled law that redundancy can also not be attributed to the legislature. Reference in this regard may be made to "Oil and Gas Development Company Limited through Manager (Pricing) v. Federal Board of Revenue through Chairman and 2 others [2016 PTD 1675] "Zaver Petroleum Corporation Limited through Director-General, Islamabad v. Federal Board of Revenue through Chairman FBR, Islamabad and another" [2016 PTD 2332], "Dr. Raja Aamer Zaman v. Omer Ayub Khan and others" [2015 SCMR 1303] and "Mst. Rooh Afza v. Aurangzeb and others" [2015 SCM R 92]. 14. Clauses (i) to (iv) refer to the nature of the trade or business in which an undertaking must be engaged in order to be covered under the definition of an 'industrial undertaking'. Clause (i) is general in nature and the language has wide meanings so as to cover a large number of undertakings. Clauses (ii) to (iv) are in relation to specific reference to a particular trade or business and definitely fall under clause (i) as well, because it either involves manufacturing of goods or materials or subjecting goods or materials to a process which substantially changes their original condition. Besides the four categories expressly mentioned in clauses (i) to (iv) the Board is also vested with the power to declare an entity as an 'industrial undertaking' through a notification published in the official gazette. In order to avoid redundancy and an interpretation leading to an absurd interpretation, every word and expression has to be given meaning. It is a settled principle of interpretation of a statute, that the provisions must be given its true meaning by construing them together in a harmonious manner. By applying these principles no other conclusion can be drawn except to hold that clauses (i) to (iv), specified in the context of the engagement of an undertaking, are independent of each other. An undertaking which is not engaged in one of the trades and businesses described in clauses (ii) to (iv) would be treated as an 'industrial undertaking' if it satisfies the tests provided in clause (i). The subsequent amendment made in section 2(29C) through the Finance Act, 2010 obviously did not bring about any material change except rearranging the provisions merely to improve its drafting. The legislative intent, however, remained the same i,e, to construe clauses (i) to (iv) as distinct and independent of each other. The larger Bench, therefore, had misconstrued the provisions of section 2(29C). 15. It is, therefore, noted that the legislative intent before or after the amendment made in section 2(29C) through the Finance Act, 2010, remained the same. According to the combined reading of section 148(7)(a) and section 2(29C), the tax collected under section 148 is not a final tax and an importer is entitled to adjustment thereof provided the following conditions are met: (i) An industrial undertaking defined under section 2(29C) has imported raw material, plant, machinery or equipment for its own use. (ii) An undertaking shall be treated as an "industrial undertaking" under section 2(29C) if; (a) It is set up in Pakistan; (b) Employs a minimum number of persons specified in sub-clauses (i) and (ii) of clause (a) section 2(29C), as the case may be depending on the type of energy it uses; (c) It is engaged in one of the trade of businesses specified in clauses (i) to (iv) or has been notified as an undertaking for the purposes of section 2(29C) by the Federal Board of Revenue through a notification published in the official gazette. 16. It is crucial in the context of the facts and circumstances involved in the instant References before us to further examine clause (i) which follows the expression "and which is engaged in,-". A plain reading of clause (i) shows that it has two distinct parts, firstly, manufacture of goods and materials and, secondly, subjection of goods or materials to any process which substantially chant their original condition. In its wisdom the legislature has used language which clearly draws a
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distinction between these two parts and inevitably have to be read disjunctively. This distinction is crucial for discerning the legislative intent. Though, prima facie, they appear to be similar but the language of the latter part has a much wider meaning and extends to eventualities beyond the conventional manufacturing of goods and materials. These two phrases cannot be treated as having the same meaning and covering similar situations, otherwise one would be rendered redundant or superfluous. As already noted, redundancy cannot be imputed to the legislature. The phrase 'engaged in subjection of goods or materials to any process which substantially changes their original conditions' is, therefore, to be interpreted by distinguishing it from 'manufacture of goods or materials'. In order to give true meaning to the provisions and by construing the two parts together harmoniously, it would be safe to conclude that the legislature has intended to cover a wider range of eventualities and not merely manufacturing of goods and materials by using the conventional methods. The legislature appears to have been conscious of the revolutionary developments achieved in the realm of technology which are beyond the conventional methods of manufacturing of goods and materials. It is also significant to note that two distinct expressions have been used i,e, 'goods' and 'materials'. Both these expressions have not been defined in the Ordinance of 2001 and, therefore, it would be relevant to refer to the dictionary meanings of the expressions 'material' and 'process': ' Advanced Law Lexicon (3rd Edition): ' Material:------------------------------------------------------------------------ ' As a noun, the substance or matter of which…
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