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Petitioner: Zona Pakistan (Pvt.) Ltd VS Respondent: Province of Sindh & others
Court Name: Sindh High Court Judge(s): Muhammad Shafi Siddiqui, Mahmood A. Khan Title: Zona Pakistan (Pvt.) Ltd vs Province of Sindh & others Case No.: C.P. No. D-5791 of 2016 Date of Judgment:2022-01-10 Reported As: 2022 SHC 33, 2022 PTD 984 Result: Petition Dismissed
JUDGMENT
JUDGMENT Muhammad Shafi Siddiqui, J. This bunch of cases consists of four categories. Category `A' is a bunch of references filed by the alleged indenters against the order of the Tribunal bringing them within the frame of Sindh Sales Tax on Services Act, 2011 (SST A 2011). The second category "B" includes those references which are filed by the department against same judgment of the Tribunal in respect of a portion that concerns with fine/penalty only. Category `C' is a bunch of petitions which are filed by the alleged indenters who, apart from filing the petitions, have also exhausted statutory remedy under SSTA 2011, and their References are attached as category `A', as above. The next category `D' is of cases/petitions which have directly been filed, without undergoing process of statutory determination. All these categories of cases have been bunched together as primarily common questions are arising out of them, which questions shall be answered and decided by this common judgment and hence we propose to do the same. Such category-wise list is attached as Annexure-A. 2. In order to understand the controversies involved in above referred cases, we may sum up the possible questions that may originate from the proceedings in consideration of the propositions of the counsel, which are as under:- I) Whether the business activities of the petitioners/applicants, who are identified as indenters are covered by SSTA 2011? II) Whether the Province of Sindh has legislative competence to tax the services of the indenters serving in this province and hence are liable to be registered under SST A 2011? III) Whether under the provisions of SSTA 2011, it is the service providers/indenters who are required to be taxed without being passed on to the recipients of the goods? IV) What could be the value of services for the purposes of SST A 2011?
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V) Whether the business activities of the indenters constitute import and export of goods and/or extra territorial application and hence the Province of Sindh lacks competence in legislating the subject law? VI) Whether the tax under question is tax on income of the indenters? VII) Whether fine/penalty was rightly reduced by the Tribunal? 3. We have heard all counsels and amongst them leading counsel were Muhammad Yousuf and Jehanzeb Awan who have substantially led the arguments and followed by almost all the counsel with some minor additions. In the same way Mr. Zameer Khalid, Commissioner Sindh Revenue Board has substantially led the arguments on behalf of respondents, ably supported by Mr . Saifullah, Assistant Advocate General. 4. It is the indenters case that they do not have any contractual relationship with the local parties receiving the goods from foreign exporters and hence in the first instance it may be a transaction of direct import by the local party through foreign entity and any understanding between foreign principal and the indenters does not come within the clutches of at least the subject provincial statute SSTA 2011. Conversely privity of contract between applicant/indenters and foreign principal is a document which are governed by foreign laws including foreign arbitration. These indenters claimed to have been paid fixed emoluments by principal and that too on the conclusion of sale of goods to the local party by its foreign principal. 5. It is claimed that since the amount is received in foreign exchange as remittance through banking channels, it is only federation which could impose tax on such foreign remittance which is otherwise covered in terms of Section 154 of Income Tax Ordinance, 2001. It is thus a tax which cannot be recovered from the foreign principal by the indenters as it becomes a direct tax and hence constitutionally not permitted through provincial legislation. It is argued that the province lack the competence to legislate on the subject on the touchstone that it is in relation to extra territorial jurisdiction and SSTA 2011 cannot encroach upon the subject of extra territorial jurisdiction in terms of Article 141 of the Constitution as it is with the parliament to legislate and make laws in reference therewith. 6. To support the activity , being of extra territorial application, it is urged that the principal of the petitioners/indenters are foreign entities and they did not have place of business or office in Pakistan and apart from this the agreement and the relationship between them i.e. principal and indenters is also governed by foreign laws and the dispute between them is resolved through a resolution or arbitration which jurisdiction too is contemplated abroad and hence the foreign entity cannot be subjected to the local laws for the purposes of implementing SSTA 2011 to recover taxes , as levied and had been the subject matter of show-cause notices issued to them (indenters). 7. Learned counsel in this regard relied upon a judgment of this Court passed in CP No.D-4778 to 4780 of 2021 i.e. case of Pakistan Mobile Communication (being unreported till date). They further relied upon the case of Imperial Tobacco where the aforesaid concept was discussed that above interpretation could be given effect where statute abrogates international law and the langu age used therein reached to such results. In support of above, They also relied upon the case of Sui-Southern , KESC , Murri Brewery . 8. On the basis of above conclusions drawn by benches of Hon'ble Supreme Court and Lahore High Court as well as of this Court, it is urged that the activities across the country and beyond territor ial limits of a province could only be governed by Article 141 of the Constit ution and hence being of extra territorial limits of this province, the SSTA 2011 lacks its application over the subject and province lacks competence to legislate. 9. In addition to the above, learned counsels have taken us to Entry No.27 of Federal Legislative List of Fourth Schedule to the Constitution of Islamic Republic of Pakistan, 1973 (hereinafter called "Constitution") that relates to import and export across customs frontiers as defined by the Federal Government, inter-provincial trade and commerce, trade and commerce with foreign countries, standard of quality of goods to be exported out of Pakistan. 10. The next entry that was relied upon was Entry No.3 of Federal Legislative List to the Fourth Schedule of the Constitution i.e. implementing treaties and agreements, including educational and cultural pacts and agreements with other countries; extradition, including the surrender of criminals and accused persons to Governments outside Pakistan. 11. Learned counsels have also relied upon Entry No.32 that relates to international treaties, conventions and agreements and International arbitration. Thus, geographical stretch of the business under consideration claimed to1 2 3 4 5
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have taken it away , beyond the territorial limits of province, as alleged, and either goods or services, could not be squeezed down to a restricted area of province of Sindh alone. It is thus concluded in terms of the aforesaid entries of the Federal Legislative List that the parliament has exclusive powers to make laws on the subjects enumerated in the Federal Legislative List and the parliament is only restricted to make laws with respect to matters not enumerated thereunder . 12. Next question that was argued by the learned counsels is doctrine of repugnancy and occupied field. These arguments are made, notwithstanding the above submissions that if the relationship of indenters, economic activities and the services being rendered, comes within the confluence of the legislative powers of both federation and the province, the subject matter is still covered by the legislative competence of federation in terms of Article 143 of the Constitution as there is seriou s inconsistency even within the domains of both federation and province and since the field has already been occu pied in terms of earlier legislation (with reference of entries relied upon), there is no room or scope left with the provincial legislature to enter into such regime. Even if the field of legislation is not occupied, as argued, and provincial legislature made an attempt to venture or attempt to legislate all such unoccupied terrain, then also the federal legislation within constitutional frame, shall push aside the provincial law to the extent it is in conflict with the federal law and it is at this point of time where doctrine of repugnancy would come into play . For this submission learned counsel for petitioners have relied upon the case of Quetta Textile . 13. It is argued that in terms of Section 154 of Income Tax Ordinance, 2001 the foreign remittance and foreign proceeds received by the indenters as commission should be final and conclusive tax to be deducted on such receipt. He further argued that the foreign exchange Manual in its Chapter 21 titled as "Repatriation of Invisible Earnings of Foreign Exchange" specifically deals with the indenting houses/agents as is covered by Entry 9 of Federal Legislative List of Fourth Schedule of Constitution and hence is out of the provincial domain as far as the levy on repatriated amount is concerned . In relation to Entries he referred above of Federal Legislative List, he submitted that these entries are to be expressed and interpreted widely and broadly rather than giving them a narrow finding, as discussed in the case of Atta Muhammad and Hirjina . 14. Replying to the above submission of counsel appearing for indenters/petitioners/ applicants, Mr. Zamir Khalid, Commissioner SBR, gave us an overall view of the history and more importantly the legislative competence of the province particularly after 18th Amendment to the Constitution. He has taken us to Entry 49 of Federal Legislative List which, in terms of 18 the Amendment, excludes the federation to levy taxes on services as previously Entry 49 has been catering for both kinds of levies. 15. Learned Commissioner further submitted that the agreements between (indente rs and foreign principals) which may either have been disclosed or concealed by the indenters from this Court, are in their nature independent of sale of goods as it is the concept of services that is being selected and touched upon by SSTA 2011, which is different from additional concept of sale of goods to the proposed buyers in Sindh or any part, which may or may not be within the province of Sindh. Foreign principal receives the services from the indenters serving within the territorial limits of Province of Sindh provided by the Constitution and SSTA 2011. On maturity of such transaction, the indenters get their commission and perhaps determine the value of service/consideration, as stipulated in terms of Section 5(1) of SST A 2011. 16. In relation to the liability to be borne by the ultimate consumer , learned Commissioner submitted that the local buyer in the matter of import indenters and also local manufacturer in a matter of export indenters has nothing to do with a service provided to the foreign principal and hence element of passing of service tax does not come in the transaction. He submitted that there is no hard and fast rule in the event of indirect taxes, that the same must be passed on to end consumer . It may be a general concept but carries exception as long as statute requires it differently . 17. With reference to the value of service for the purposes of SSTA 2011, learned Commissioner submitted that the commission received by both kind of indenters is separable from the sale of goods and the value is identifiable and calculable. The Board has the prerogative under the law to fix value inclusive or exclusive of the tax which could be determined within frame of SSTA 2011 and the Rules framed thereunder . He thus concluded that this exactly is not6 7 8
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the principle on which the parties are litigating. It is rather the concern of indenters that province lacks competence, which is seriously expressed by the petitioners. 18. It is argued that the petitioners have made an attempt to mislead the Court that indenters are in fact importers and exporters of goods and hence are covered by relevant entries in the Federal Legislative List (4th Schedule). The Commissioner emphasized that as far as sale of goods are concerned in terms of Section 2(13) of Sales Tax Act, 1990 it could be a subject matter thereunder as being a person who imports the goods into Pakistan other than import indenters and for the purposes of export indenters it is the manufacturer of goods within Pakistan who could come within the definition of exporter of goods but the indenters do not come in the picture as they are neither importers nor exporters of the goods. 19. In the similar way, Section 154 of Income Tax Ordinance 2001 read with Division IV Part-III of the First Schedule to ibid law it is apparent that only an authorized dealer of the bank was required to deduct notified amount of the income tax from the comm ission received by the indenters. It does not lead to conclude that this deduction is only meant to consider the recipient of such amount as being importer and exporter of the goods. 20. The foreign remittance, discussed is the one which is exempted from such taxes as received under section 111(4) of the Income Tax Ordinance 2001 subject to certain conditions and limitations. This is not applicable to the remittances received by the indenters from their foreign principal and hence distinguishable from kind of remittances brought for consideration of this Court under section 111(4) of Income Tax Ordinance. Tax on service and tax on income both are separate and distinct and for the purpose of rende ring services the provinces are competent to legislate and levy taxes. 21. We have heard the learned counsels appearing for petitioners and the department as well as learned Deputy Attorney General and Assistant Advocate General and with their assistance have perused material available on record. 22. The dispute commenced when show-cause notices were issued by the Assistant Commissioner , Sindh Revenue Board requiring the indenters to be registered with Sindh Revenue Board under section 24B of SSTA 2011 with consequential penal action under Serial No.1 of Table provided in Section 43 of SSTA 2011 on violation and breach of Section 24 of the Act read with Rules of Chapter II of Sindh Sales Tax On Services Rules, 201 1. 23. Petitioners in substance have challen ged the definition 2(51A) provided by SSTA 2011 whereas in two of the petitions Rule 41B of Sindh Sales Tax on Services Rules 2011 are sought to be declared ultra vires the Constitution which provide tax benefit in relation to passing on issue. By definition under 2(51A), the indenter is defined to be a person who is representative of a non-resident person or non-resident company or of a foreign product or a foreign service. The indenters get their consideration in the shape of commission, remuneration or royalty on a transaction, irrespective of whether the transaction has taken place out of his effort, consent or otherwise. This is a universal definition and simply by challenging a definition of indenter nothing could be achieved by the petitioners. This definition is claimed to be confiscatory and claimed to be hit by doctrine of occupied field in terms of entries relied upon and/or having been catered by Chapter 21 of Foreign Exchange Manual and Section 154 of Income Tax Ordinance, 2001 which shall be discussed later for the purposes of considering whether challenge to this definition could still be of any benefit. The petition ers have challenged PCT Heading 9819.1200 to the First Schedule of SSTA 2011 being ultra vires to the Consti tution as contrary to referred entries of Federal Legislative List that deals with foreign exchange, import/export and extra territorial limits, being within the domain of federation. The petitioners/ applicants have further sought declaration that the impugned show-cause notices which seek registration of these indenters, to be declared ultra vires to the Constitution in view of above. 24. Followed by 18th Amendment to the Constitution, Province of Sindh promulgated Sindh Sales Tax on Services Act, 2011. Its constitutionality discussed in Freight Forwarders and Pakistan Mobile (Supra) and no further discussion is required as far as provincial competence to legislate on the subject is concerned. Only thing that requires consideration is whether the event of rendering services to foreign principal is covered by relied entries and hence provincial competence to legislate on the subject. The relevant definitions of indenters, resident, service/services, which may be relevant for the purposes of concluding the lis are as under:- "2. Definitions.-- In this Act, unless there is anything repugnant in the subject or context--9
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(1) ......... (51A) "indenter" means a person who is a representative for a non-resident person or a non-resident company or a foreign product or service and who gets a consideration in the shape of commission, fee, remuneration or royalty on a transaction, irrespective of whether the transaction has taken place out of his effort, consent or otherwise; ...... (73) "resident" means-- (a) an individual who, in a financial year , has-- (i) a place of business, whether whole or part thereof, in Sindh in any mode, style or manner; or (ii) his permanent address, as listed in the individual' s national identity card, in Sindh; or (iii) a permanent representative to act on his behalf or to provide service on his behalf in Sindh; (b) an association of persons or a company which, in a financial year , has-- (i) its registered office is in Sindh; or (ii) its place of business, whether whole or part thereof, in Sindh in any mode, style or manner; or (iii) a permanent representative to act on its behalf or to provide service on its behalf in Sindh; or (iv) the control or management of the association of persons or the company , whether whole or part thereof, situated in Sindh at any time during the financial year; .... (79) "service" or "services" means anything which is not goods and shall include but not limited to the services listed in the First Schedule of this Act. .... (96) "taxable service" shall have the meaning given under section 3." 25. As stated above, after 18th Amendment the scope of tax on services was excluded from the federal domain which paved its way to the provincial government subject to legislative competence within the frame of Constitution, as it stood. 26. An attempt has been made to create an impression that indenters are in fact importers and exporters of the goods and thus are ousted from purview of the provisions of services and have relied upon several entries of Federal Legislative List of Fourth Schedule of the Constitution and Section 154 of Income Tax Ordinance, 2001, read with Chapter 21 of Foreign Manual 2012. 27. Sale of Goods is an independent transaction as compared to the services provi ded by the indenters to a foreign principal. It cannot be equated or kept at par with the goods being supplied to a local buyer or to a foreign principal, as the case may be, as both the export indenters and import indenters are being subjected to similar provisions under consideration. Both categories of indenters i.e. either import and/or export indenters provide services under an agreement or arrangement to foreign principal and hence it is this event which formed part of consideration as far as SSTA 2011 is concerned and not the goods or value of the goods. It is the foreign principal who receives services from these specialized and quali fied entities calling themselves as indente rs in Sindh under agreement(s) and are not agreement(s) of import and export of the goods. These services by indenters provide special assistance to foreign principals on account of their better understanding of goods? description and its requirement, utility and their marketing skills, as the case may be, in terms of understanding between indenters and foreign principal. 28. The consideration and commission for such service matures at the time of maturity of sale but this itself is not sufficient to loop this transaction with import and export of goods and the value of service to be dealt with in terms of Section 5 of the SSTA 2011. The definition provided under subsection (51A) of Section 2 of SSTA 2011 thus covers the event disclosed above. It means a person who is representative of a non-resident person or a non- resident company or a foreign product or service and who gets a consideration in the shape of commission, fee, remuneration or royalty on a transaction, irrespective of whether the transaction has taken place out of his effort, consent or otherwise. (This definition is stretched for the benefit of authorized indenters in case they are bypassed, but has nothing to do with issue in hand.). It does not count that the goods are being supplied by principal to a buyer who may be operating from a place beyond territorial limits of this province for the purposes of tax under consideration.
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29. Conditions set forth for application upon the representative defined above for that particular financial year are that he/she must have (i) a place of business, whether whole or part thereof, in Sindh in any mode, style or manner; or (ii) his permanent address, as listed in the individual' s national identity card, in Sindh, (iii) a permanent representative to act on his behalf or to provide service on his behalf in Sindh. 30. So far as association of a person or company is concerned, the resident mean s (i) its registered office must be in Sindh, (ii) its place of business, whether whole or part thereof, in Sindh, (iii) a permanent representative to act on its behalf or to provide service on its behalf in Sindh and (iv) the control or management of the association of persons or the company , whether whole or part thereof, situated in Sindh at any time during the financial year . 31. The indent by the indenters may be of goods likely to be imported or exported out of services rendered by them, but these goods themselves count nothing for the event under consideratio n. The elements in it i.e. certain services being rendered to the foreign principal with regard to the nature of goods sought to be imported or exported and/or its marketing/promotions etc. distinguished it from each other . It is also immaterial for the purposes of service/services under consideration in this province that the goods are being supplied to an area beyond the territorial limits of a particular province i.e. Sindh. Material consideration is that services once rendered in Sindh and materializes within the condition stipulated above, it constitutes an event for SST A 2011. 32. The subject of external affairs, implementation of treaties etc. agreements that concerns with education, culture promote and/or extradition may be the exclusive domain of federation but it does not spill over entries such as Entry 49 after its amendment, meant for imposition of taxes which entry consciously excludes tax on service after 18th Amendment. Similarly Entry 27 and 32 in the Federal Legislative List of Fourth Schedule enabled Federation to regulate such laws to which there is no cavil however it does not overpower Entry 49 with its exclusion so far as sales tax on services are concerned. Expounding the entries widely and liberally does not mean that the scope of entry could also be altered. Regulations as far as identified subjects, such as import, export external affairs, implementation of treaties, educational and cultural issues etc. are concerned, federal government regulates them in terms of policies framed, however , Entry 43-53 of Federal Legislative List deals with levy of tax which cannot be subjected to any other entries in the Federal Legislative List of Fourth Schedule of the Constitution. We may conclude that sales tax on services cannot be subjected to entries such as, 3, 9, 27 and 32 of Federal Legislative List of Fourth Schedule. 33. The subject controversy is of sales tax on services, which, for the purposes of taxes should have been fallen within Entries 43 to 53, as settled in the cases of Durrani Ceramics and Sapphire Textile . 34. Similarly , the case of Pakistan Mobile Communication (Supra) discussed the meaningful arrangement of these entries and that the subject of imposition of taxes/duties find its way within the entries 43 to 53 of the Federal Legislative List hence the applicability of the referred entries by petitioners such as Entries No.3, 9,…
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