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Petitioner: C.I.R., ZONE-IV, LTU, KARACHI VS Respondent: Messrs PEARL SECURITIES (PVT.) LTD. KARACHI
Court Name: Appellate Tribunal Inland Revenue Judge(s): Muhammad Jawed Zakaria, Faheem-ul-Haq Khan Title: C.I.R., ZONE-IV, LTU, KARACHI vs Messrs PEARL SECURITIES (PVT.) LTD. KARACHI Case No.: F.E.A. No.77/KB of 2012 Date of Judgment:2013-11-05 Reported As: 2015 PTD (Trib.) 319 Result: Order accordingly
Judgment ORDER MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER, J.--This order will dispose of the captioned appeal, which has been preferred against Order-in-Appeal No.10 of 2012 dated 31-7-2012 by the Department/appellant on the grounds set forth with the memo. Of appeal. 2. Brief facts of the case are that the taxpayer is engaged in the business as a stock broker. After scrutiny of the annual financial statements and returns of sales tax and federal excise duty for the period July, 2009 to June, 2010 it was found that the taxpayer is not paying the Federal Excise Duty on the various receipts. In this respect a show-cause notice under section 14 of the Federal Excise Act, 2005 was issued to the taxpayer, and asked for explanation along with documentary evidence to defend his case. The taxpayer filed his reply and documentary evidence, which was found unsatisfactory. After providing opportunity of hearings to the taxpayer the DCIR passed the Order- in-Original No.2/18/2012 dated 19-3-2012 for recovery of Rs.66,847,648 along with default surcharge under section 8 of the Federal Excise Duty Act, 2005 and a penalty amounting to Rs.3,342,384. 3. The taxpayer being aggrieved with the impugned order-inoriginal filed an appeal before the learned Commissioner Inland Revenue (Appeals-III). The learned CIR(A) vide his Order-in-Appeal No. 10 of 2012, dated 31-7-2012 adjudicated that vide S.R.O. 550(1)/2006 dated 5-6-2006 read with Rule 43 C of the Federal Excise Rules, 2005 the Stock Brokers are required to pay FED on their brokerage services only in respect of purchase or sale of share in Stock Exchange and the "Late Charges" earned for the arrangement of financing facilities are distinctly different from the brokerage and commission in respect of purchase or sale of shares in a Stock Exchange. Therefore, other income i.e. "Late Charges" will not attract FED in sales tax mode under Notification S.R.O. 550(I)/2006 dated 5-6-2006 read with Rule 43 C of the Federal Excise/Rules, 2005. The CIR(A)
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further held that if for argument sake it is assumed that mark up on financial services are covered even then the same will not attract FED in sales tax mode as same are exempt from FED under Sub- Rule (4) of Rule 40A of the Federal Excise Rules, 2005 meaning thereby services rendered by the respondent do not fall under the services rendered by stock brokers as provided under Rule 43-C of the Federal Excise Rules, 2005. 4. Being aggrieved and dissatisfied from the order-in-appeal, the department has now come in appeal before this Tribunal. 5. Mr. Shafqat Hussain Kehar, DR, attended on behalf of the appellant/department and Mr. Abdul Qadir Memon and Mr. Rashid Malik, Advocates attended on behalf of the taxpayer. 6. During proceedings before this Court, learned DR contended that the impugned order of the learned CIR(A) is bad in law and on facts and the learned CIR(A) is not justified in deciding the case. The DR during the course of hearing further submitted the following preliminary objections in writing:- (I) The taxpayer during the course of hearing raised the ground that the matter i.e. Action period between show-cause and the final order was barred by time. In this regard it is said that there was no issue of time Bar before the learned CIR (Appeals). Neither the taxpayer has filed the appeal against the said order. The matter in this regard cannot be raised at this stage due to the reason that taxpayer has not filed the appeal within time. Further, on factual grounds matter is not as per law. (II) The learned CIR (Appeals) has not adjudicated the issue involved by discussing the various provisions of law i.e. Entry No. 13 of Table II of First, Schedule of the Federal Excise Act, 2005 in which services of brokers have been made taxable. In facts the learned CIR(A) has admitted that the "Brokerage Services" are excisable services. User of this phrase by CIR(A) means his admittance that the services within "Brokerage House" are covered by the provisions of subsection (12) of section 2, which includes ancillary services are excisable items. In this regard it is said that the purpose of the "Brokerage House" is to provide various services to the clients including brokerage. This is evident from the Note No. 1 to the audited statements of account in which the principal activity of the company has been mentioned as under:- " the company is a corporate member of Karachi Stock Exchange (Guarantee) Limited and National Commodity Exchange Limited. The principal activity of the company includes, share brokerage, consultancy services and underwriting." (III) However, the CIR(A) after using the above phrase of "brokerage services" commented that the "services for arrangement of financing facilities are different from brokerage commission, therefore, same will not attract FED in Sales Tax Mode under Notification S.R.O. 550(1)/2006 dated 5- 6-2006 read with Rule 43C of Federal Excise Act, 2005. In this regard it is said that S.R.O. 550(1)/2006 is related advertisement, facilities of travel, carriage goods by air, shipping agents and telecommunication services and not applicable on Stock Brokers. Similarly, the learned CIR(A) has also wrongly applied the provisions of subsection (4) of section 40A which is applicable only on Banking Companies, Financial Institutions and Non-Banking Finance Companies. Hence, the findings of the CIR(A) are not as per law and thus relief provided is in result of some misunderstanding of the relevant/quoted provisos of law. (IV)Word "Gross Commission" has been written of Rule 43C(1) of Federal Excise Act, 2005. Hence, entire Brokerage House, Income is a Commission which is excisable "Services". It may be mentioned here that entire "services" are excisable under Entry 13 of Table 11 of the First Schedule with reads as under:-- (1) (2) (3) (4)
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13 Services provided or rendered by Stock Brokers.9819.1000 Sixteen percent of the charges. (V) From above, it is abundantly clear that all services are excisable and there is no exception. The Rule 43C is only providing the mechanism. Further, the Rule says that all the items of Brokerage House are Commission. It is mentioned that any arrangement to provide finance is actually nothing but arrangement of funds from bank(s) and payment of the investors. This is reflecting in Balance Sheets as the loan of banks and debt against the investors respectively. Hence, no financial lending of registered person is involved. The registered person takes the financial charges from the investors on account of Margin Finances or Badla etc. This fact is available in the Balance Sheet of the registered person where on Note No. 7 to the Audited Statements of Account. It is abundantly clear that loan is either for the capital requirement or for trading of shares. ' Hence, incidence of interest if any is that of banks or financial institutions. His interest is only to the extent of charging certain amount on the facility of loan provided to customers from banks. Hence, the receipts are services in nature and not interest on the money lending. In other words money lended is that of the banks and not of the registered person. (VI) Under the law, the brokerage house (Member Karachi Stock Exchange) cannot transact the money lending business. Hence, it cannot claim the exclusion from FED under Rule 40A(4) of FED Rules. Even if the transaction has been made it will be considered as the commission or brokerage income of the said Registered person (Stock Exchange Member). Under the FED Act, Rule 40A(4), this exclusion available only to the Banking companies and financial institution and the stock members are not covered therein. Further, any act on violation of law will not make the taxpayer as a financial institution and thus tax charge of his own wrong doing. No one can take advantage of his wrong act. This has been decided in the case of Messrs Gear Hobbings Ltd cited at 2003 PTD 739. (VII) The Registered person company is providing services. The main section 12(2) says that services include ancillary facilities and utilities. The facilities available in the stock exchange include the arrangement of money lending and taking charges from the customers. Hence, gross/entire services provided by the company in the brokerage house are excisable items. (VIII) The purpose of brokerage house is to earn the commission income and providing facilities in the form of loan arranged from banks and subsequently lended to the customer is associated with the brokerage house-receipts/services. Hence, receipt cannot be separated under one head or another head and thus excisable and not excisable. The auditor of the registered person in original audited account has mentioned these as the commission income considering the same as ancillary to brokerage house services. In the subsequent re-narration of the facts the taxpayers has submitted the letter of auditor Messrs Mansoor Aslam Seraj Saleem, Chartered Accountants attaching the breakup of services which includes commission and late payment charges amounting to Rs. 313,652,572. Here again the auditor has not admitted it a markup income as such. (IX) In fact it is to mention here that under section 12(2) of the FED Act services are taxable which includes all the services provided in the brokerage house. The markup paid on loan to banks (reflecting in liability side of balance sheet as loan against equity requirement and trading of shares) and on asset side as debtor to various customers and markup received on the said facility is actually ancillary service to the commission earned from the customers. Hence, it is purely a service receipt and excisable item. (X) The fact is that the entire income is commission service or ancillary services as is evident from the audited accounts. (XI) It has already been narrated that late payment charges are the nature of services provided in the brokerage house. (XII) It has already mentioned above that all services in brokerage house are excisable in nature.
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(XIII) It is to say that the taxpayer itself says that there are the late payment charges. Hence, considering it the markup within the meaning of sub-rule (4) of Rule 40A and claiming itself as the financial institution or the banking company is against the factual position. The taxpayer receives only the late payment charges and those are ancillary to brokerage house services i.e. Commission. 7. In addition to the above, the learned D.R. Submitted that the CIR(A) was not justified in placing reliance on sub-rule (4) of rule 40A of the Federal Excise Rules, 2005 which provides exemption to the financial institutions and the respondent being not a financial institution, the same is not applicable in the case of the respondent. He last, submitted two questions before this Tribunal for resolving the issue. The same are reproduced hereunder:- (A) Whether under the facts and circumstances of the case, the learned Commissioner Inland Revenue (Appeals-III) was justified to exclude the service of arrangement of financing facilities form the value of service provided to clients by the registered person in the light of section 12(2) of the Federal Excise Act, 2005 read with the rule 43C of the Federal Excise Rules, 2005? (B) Whether under the facts and circumstances of the case the Deputy Commissioner IR had not passed order with legal backing of the Federal Excise Act, 2005? 8. The learned D.R. Prayed that in view of the above stated facts, grounds and question of law, it is earnestly this Appellate Tribunal Inland Revenue may graciously be pleased to answer the questions referred to hereinabove in favour of the Applicant and declare the impugned order passed by the Commissioner IR (Appeal-III) not sustainable in law, otherwise the applicant department will suffer irreparable loss, as the matter is related to and connected with recovery of legitimate Government revenue payable by the respondent. 9. On the other hand, the learned Authorized Representatives of the respondents (AR) submitted that the show-cause notice under consideration was issued on 30-9-2011 and the appellant was required to pass the order within 120 days; whereas the Order-in-Original No. 2/18/2012 was issued on 19-3-2012, therefore, the same is barred by time by 49 days. The learned AR also stated that they have raised this ground before the learned Commissioner Inland Revenue (Appeals III). It was also argued that keeping in view the ratio of judgment reported as 2004 PTD (Trib.) 2352, legal issue/grounds being purely legal in nature can be raised at any stage and in order to dispense justice Courts/ Tribunals have to allow the same to decide the 'controversy once for all touching the merits of the case from its all angles. 10. The AR further submitted that regarding the use of term gross commission in Rule 43C(1) of the Federal Excise Rules, 2005, it does not mean that it will be applicable on all services rendered by the respondent. As a matter of fact it means that the respondent will not be allowed to make deduction of any expenses/charges or sub-commission paid out of commission earned relating to purchase or sales of shares in Stock Exchange only. 11. The learned counsel for the respondent pointed out that the ACIR, while finalizing the proceedings under section 122(5A) of the Income Tax Ordinance, 2001 for the same period and subsequent tax year 2011 for income tax purposes has accepted that the respondent is also recovering late charges on overdue amount from their clients and has accepted the taxpayers explanation for levy of income tax on brokerage commission under Final Tax Regime and levy of income tax on late charges under the Normal Tax Regime. In other words it has already been accepted by the department that the taxpayer is not only engaged in providing brokerage services to their clients for sale and purchase of shares in a stock exchange, but it is also charging late payment on overdue amounts, which 'does not attract Federal Excise Duty under section 3 read with Entry No.13 of Table II of the First Schedule to the Federal Excise Act, 2005 and Rule 43C of the Federal Excise Rules, 2005.
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12. The AR submitted that in view of entry No.13 of the First Schedule read with the scope of such services laid down in rule 43-C of the FED Rules, 2005 read with Notification S.R.O. 550(I)/2006 dated 5th June, 2006, the department itself for the period from July 2010 to June 2011 has accepted that the taxpayer was required by law only to charge and deposit FED on Gross Commission on account of services rendered by them to their clients for purchase or sales of shares in Stock Exchange only. He further submitted that no default surcharge/penalty can be recovered from a taxpayer till the department establishes through independent and cogent evidence that the taxpayer has intentionally failed to follow any provision of the Federal Excise Act, 2005. No evidence exists which establishes that the respondent has intentionally failed to comply with any provision of Federal Excise Act, 2005. It has been held by the Superior courts in number of judgments that default surcharge and penalty cannot be imposed in the absence of mens rea and without absolute proof. Reliance is placed on the recent judgment of Honorable Supreme Court of Pakistan in Civil Appeals Numbers 1866/1996, 1262/1999, 1288/2000, 1293, 1294, 1296 and 1306 of 2001. The relevant portion of the said judgment is reproduced hereunder:-- "Each and every case has to be decided on its own merits as to whether the evasion was wilful or mala fide, decision on which would depend upon the question of recovery of additional tax" 13. Rival parties have been heard and case record perused. On the legal issue relating to limitation period, we do not agree with the respondent that order-in-original is barred by limitation. In the instant case an agreed date of show-cause notice is 30-9-2011 and an agreed date of order-in- original is 15th June, 2012 meaning thereby consumption of 167 days. The learned AR pleased that the officer was bound to pass the order within 120 days. On the contrary the provisions of section 31(3) of Federal Excise Act, 2005 permit further extensions of 60 days for reason to be recorded in writing and 30 days in case the adjournments availed by the taxpayer. Hence a total number of 210 days were available to the officer to pass an order-in-original. The record reveals that case was heard on 7-10-2011, 25-11-2011, 22-2-2012 and 28-2-2012. The hearings and factual grant of opportunities and adjournment fully justified the officer to step in the additional time limits, which is beyond 120 days and also construed valid reason; hence we hold that order-inoriginal is within days statutory time limit. The plea of the taxpayer is rejected on this score. 14. Reverting back to the facts of the case the respondent/taxpayer derives income mainly from sale and purchase of shares in Stock Exchange and from these activities earned commission income. Apart from these activities the respondent received late payment charges for arranging financial facilities to its clients on overdue amounts. The treatment of late payment charges has been accepted by the department as income from other source while proceeding under section 122(5A) of the Income Tax Ordinance, 2001 for the tax years 2010 and 2011 by the higher authorities i.e. Additional Commissioner while the Order-inOriginal No.02/2012 dated 22-3-2012 by the Deputy Commissioner who is lower in rank than the Additional Commissioner. From perusal of the amended Order under section 122(5A) of the Income Tax Ordinance, 2001 we have found that the while passing the order the department itself treated the late payment charges recovered from its clients in respect of such debts qualify as "profit on debt" under section 2(46) and the same qualify under section 39 as "income from other Source". The above said factual and legal position is fully verifiable from the amended assessme nt under section 122(5A) of the Income Tax Ordinance, 2001 passed by the learned Additional Commissioner-IR (Audit Range-A), Zone II, LTU, Karachi and confirmed and accepted by the department for the tax year 2011 itself and in its order of the subsequent tax year vide order under section 14 of Federal Excise Act dated 27-8-2012. The Deputy Commissioner vide its Order No. DCIR-03/Zone-IV/LTU/2011-2012 dated 27-8-2012 has vacated the show-cause notice dated 19-3-2012 by accepting the treatment of late payment charges not liable to FED. The relevant extract from the order passed by the Deputy Commissioner IR under section 14 of the Federal Excise Act for the subsequent period is reproduced as under:-
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"The off-shot of above discussion is that the Registered Person was required by law to levy FED on gross commission on account of services rendered by it to their clients for purchase and sales of shares in a Stock Exchange, as per entry No. 13 of the First Schedule read with the scope of such services laid down in Rule 43-C of the FED Rules, 2005 read with Notification S.R.O. 550(1)12006 dated 5th June, 2006. The record and evidences provided during the course of proceedings shows that the Registered Person has duly charged and paid FED on the gross commission component of its receipts and therefore the show cause notice dated 19-3-2012 is hereby vacated." 15. From perusal of the above extract from the order passed under the FED regime it is manifest that the department has withdrawn the notice issued for the subsequent year and hence accepted the principle stance of the taxpayer. At this juncture we may observe that where departmental practice had followed a particular course in implementation of some rule, whether right or wrong, it would be extremely unfair to make a departure from it and thereby disturb rights that have been settled by a long and consistent course of practice. 16. The Inland Revenue has been established just to facilitate the taxpayers under one roof facility. Had the DCIR scrutinized the record of income tax proceedings and tried to tally it from the Federal Excise/Sales Tax he would not have come to such erratic conclusion. The relevant portion from the order under section 122(5A) of the Income Tax Ordinance, 2001 for the tax year 2010 is reproduced as under:-- "The Taxpayer on one hand has incurred huge financial costs and on the other the late payment charges have been received/ charged to the various clients on behalf of whom various shares were purchased. The late payment charges have also been clubbed with the commission in the accounts. The punch line is the corresponding income i.e. "late payment charges" has been included in the income offered for the year for tax and that too under normal law. The amounts due from various clients in respect of the stocks purchased on their behalf and credited to their ledgers qualify "debt" defined under section 2(15). The late payment charges imposed/recovered from various clients in respect of such debts qualify as "profit on debt" as defined under section 2(46) and the same qualify as "income from other sources" i.e. Section 39 the corresponding financial costs incurred on the borrowed sums used for such purposes of clients is therefore, admissible against the said profit on debt- which has been offered for tax taxed under normal law." (Underline and bold provided for emphasis) 17. The Definition of "profit on debt" as used in the above said order under section 122(5) of the income Tax Ordinance and as has been defined in section 2(46) of the Income Tax Ordinance, 2001 which is reproduced as under:-- (46) "profit on a debt"l[whether payable or receivable, means] - (a) any profit, yield, interest, discount, premium or other amount, owing under a debt, other than a return of capital; or (b) any service fee or other charge in respect of a debt, including any fee or charge incurred in respect of a credit facility which has not been utilized; 18. The other income defined under section 39 of the Income Tax Ordinance, 2001 is as under:- "39. Income from other sources.---(1) Income of every kind received by a person in a tax year, if, it is not included in any other head, other than income exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head "Income from Other Sources", including the following namely:-- (a) [Dividend;] (b) [royalty;] (c) profit on debt; (cc) additional payment on delayed refund under any tax law;
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(d) ground rent; (e) rent from the sub-lease of land or a building; (f) income from the lease of any building together with plant or machinery; (fa) income from provision of amenities, utilities or any other service connected with renting of building; (g) any annuity or pension; (h) any prize bond, or winnings from a raffle, lottery, prize on winning a .Quiz, prize offered by companies for promotion of sale or cross-word puzzle; (i) any other amount received as consideration for the provision, use or exploitation of property, including from the grant of a right to explore for, or exploit, natural resources; (j) the fair market value of any benefit, whether convertible to money or not, received in connection with the provision, use or exploitation of property; and (k) any amount received by a person as consideration for vacating the possession of a building or part thereof, reduced by any amount paid by the person to acquire possession of such building or part thereof. (1) any amount received by a person from Approved Income Payment Plan or Approved Annuity Plan under Voluntary Pension System Rules, 2005; 19. The heads of income has been defined under section 11 of the Income Tax Ordinance, 2001 the same is reproduced as under:-- "11. Heads of income.---(1) For the purposes of the imposition of tax and the computation of total income, all income shall be classified under the following heads, namely: -- (a) Salary; (p) Income from Property; (c) Income from Business; (d) Capital Gains; and (e) Income-from Other Sources. (2) Subject to this Ordinance, the income of a person under a head of income for a tax year shall be the total of the amounts derived by the person in that year that are chargeable to tax under the head as reduced by the total deductions, if any, allowed under this Ordinance to the person for the year under that head. (3) Subject to this Ordinance, where the total deductions allowed under this Ordinance to a person for a tax year under a head of income exceeds the total of the amounts derived by the person in that year that are chargeable to tax under…
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