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Official Citation: 2024 CLD 580
Court / Jurisdiction: Sindh High Court
Year of Decision: 2022
Decision Date: 2022-01-27
Parties: Pakistan Stock Exchange Limited vs Sindh & others
Ruling Summary: This decision was rendered by the Sindh High Court on 2022-01-27, officially reported as 2024 CLD 580. In this matter between Pakistan Stock Exchange Limited and Sindh & others, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2024 CLD 580
Court Name: Sindh High Court Judge(s): Muhammad Shafi Siddiqui, Mahmood A. Khan Title: Pakistan Stock Exchange Limited vs Sindh & others Case No.: C.P. No. D-3601 & 3602 of 2018 and 3302 & 3422 of 2019 Date of Judgment:2022-01-27 Reported As: 2022 SHC 30, 2024 CLD 580 Result: Accordingly Dismissed
JUDGMENT
JUDGMENT Muhammad Shafi Siddiqui, J. These four petitions impugned four individual show-cause notices dated 13.04.2018 (of same date in CP No.D-3601 and 3602 of 2018), 25.04.2019 and 11.05.2019 respectively in the following petitions, involving different tax period on the count that imposition of Sindh Sales Tax on Services on the petitioner 's income arising from listing fee and exchange operation earned by it, is ultra vires to the Constitution. 2. It is the case made out by the petition er that the respondent Sindh Revenue Board (SRB) cannot influence or exert their provincial executive authority over petitioner since it is a body created in pursuance of subjects enumerated in Fourth Schedule to the Constitution of Islamic Republic of Pakistan, 1973 (hereinafter referred to as the "Constitution") having federal legislative domain. 3. The petitioners claimed to have been engaged in conducting, regulating and controlling the trade of buying, selling and dealing with securities. The present enactment of Stock Exchanges (Corporatization, Demutualization Et Integration) Act, 2012 (hereafter referr ed to as "Act 2012") was introduced by Federal Legislature to develop a uniform capital market in the country and to facilitate the integration of existing stock exchanges and to sum up such uniformity , in pursuance of Entry 30 of Part-I of the Federal Legislative List that concerns with stock exchange and future markets with the object of business not confined to just one province. Learned counsel laid emphasis on Article 137 of the Constitution and submitted that the question whether a province has a capacity under the Constitution to impose sales tax on services on the body that is covered by Federa l Legislative List has now been a concluded and settled issue in terms of authoritative judgment of Hon'ble Supreme Court in the case of Civil Aviation Authority . 4. Learned counsel for petitioner further submitted that the petitioner was fully controlled by a federal body i.e. Securities & Exchange Commission of Pakistan earlier when it was Karachi Stock Exchange Limited through its Article 22(a)(ii) of Articles of Association of Karachi Stock Exchange Limited. At the relevant time SECP was1
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controlling the Karachi Stock Exchange by nominating and appointing directors to its Board, apart from filling of any casual vacancy on the Board of Directors through Article 24 which include appointment, removal and termination of managing director . Learned counsel however has not pressed entry No.3 and 13 of Part-II of Federal Legislative List though he pleaded them in memo, instead has seriously pictured the effect of Entry 6 of Part-II of Federal Legislative List. 5. Rootage of the impugned notices was triggered on account of earlier correspondence between petitioner and predecessor of respondent No.3 when petitioner received a letter in relation to income realized from listing fee and exchange operation, which was claimed to be taxable under relevant Tariff Headings disclosed. On receipt of such notices, prior to its integration, it underwent departmental proceedings before respondent No.2 i.e. Sindh Revenue Board where the predecessor Karachi Stock Exchange was compulsorily registered as a service provider and was directed to pay sales tax on services on management services "provided in Sindh". 6. The facts, as disclosed in the instant proceedings, are such that the matter was resolved when respondent No.2 issued notification dated 09.05.2016 to waive all penalties and 90% of the default surcharge levied by the Commissioner Appeals, Sindh Revenue Board whereby the petitioner deposited the principal amount adjudged by the officer of Sindh Revenue Board and began charging Sindh sales tax on services on management services. Those proceedings were in pursuance of show-cause notice of 2015 which ended up before the Tribunal on account of withdrawal of appeal on 02.06.2016 in view of above notification, rendering the impugned order therein as final except for quantum for which notification was issued. 7. In relation to period of July 2011 to June 2012 petitioners' counsel urged that under section 23 of Sindh Sales Tax on Services Act, 2011 respondent No.2 was empowered to pass an order (under section 23) where a notice is given to the person in default of such payment within eight years from the end of tax period to which the order refers. This time period was earlier framed as five years which was substituted by Sindh Finance Act 2016. It is claimed that it cannot have retrospective effect when a show-cause notice was issued in the year 2018 for the period 2011 and 2012 as, in relation to a time barred claim, on the basis of the then existing laws, vested right claimed to have accrued in favour of petitioner . 8. It was further urged that the alleged advertisement services received by the petitioner consists of a number of transactions and some of them do not fall within any of the tariffs or Tariff Headings, as claimed, as they relate to the internal printing of books and letters whereas many other transactions fall outside scope of Sindh sales tax on services on account of notification of exemption. 9. Although Entry 3 and 13 of Part-II of Federal Legislative List was not pressed into service however it is argued that the activities of petitioner are now trans-provincial in nature and as such for Sindh, sales tax liability to be ascertained on the basis of the revenue generated from such services provided by the petitioner and has to be bifurcated between services provided to the customer within Sindh and services provided to customers outside Sindh and thus any fee charged for services provided to the customers outside the province falls outside the purview of the Act i.e. Sindh Sales Tax on Services Act, 2011 and no Sindh sales tax on services can be claimed in this regard and on this count too the notices are ultra vires. 10. Being a member 's entity , Mr. Hyder has highlighted the doctrine of mutuality and relied upon Karachi Golf Club' s case. 11. In response to the arguments of Mr. Hyder Ali Khan, Mr. Muhammad Tariq Masood, learned counsel for respondents, has assisted this Court and has also taken us to the history prior to corporatization of stock exchanges. He submitted that petitioner 's predecessor in interest originally surrendered to the jurisdiction of SRB in March 2013 and hence now the challenge to the jurisdiction is not available with the petitioners. 12. Learned counsel further submitted that the existence and creation of stock exchange is not by way of an act of parliament rather it was a voluntary act of individuals who associated themselves and formed an association. The association was originally dealt with under Companies Act 1913 which was made applicable in the formation of petitioner 's predecessor in interest. The company was registered by the Registrar of Companies as a company limited by guarantee.2
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13. Had petitioner or its predecessor in interest been a creation of statute, it is argued that, the statute itself would have supported it as is in case of National Bank of Pakistan Ordinance 1949, SECP Act, 1997, Civil Aviation Authority Ordinance 1982, Hyderabad Development Authority Act, 1976. This matrix is missing in the instant Act 2012 which was promulgated on account of a global necessity , as felt by the federation, that led to promulgation of the Act 2012 which concerns its corporatization, amalgamation only . 14. On merits, learned counsel for respondent has opposed the applicability of Civil Aviation Authority' s judgment of Hon'ble Supreme Court (Supra) as none of the three elements of the control of stock exchange i.e. administrative, financial and power to winding up the business of petitioner could be exercised by the federation. It is contended that the Government of Pakistan through SECP exercised its control over all issues of stock exchange business including appointment of directors. In response to issue of a regulatory authority and/or Regulations in terms of Section 6 and 7 of the Securities Act, 2015 (hereinafter referred to as "Act of 2015"), Mr. Tariq Masood, by making references of some of the relevant definitions and the necessities of the Act itself, submitted that the ibid Act of 2015 recognizes only one kind of Regulation and that is those by SECP and that alone does not frame petitioner as a regulator within Entry 6 of Part-II of Federal Legislative List. 15. The next limb of arguments of the learned counsel in response to rebut the arguments of statutory regulations is that there is no express provision in the entire Act of 2015 which specifically empowers Karachi Stock Exchange to impose any penalty and there is nothing in the Act of 2015 which can even impliedly suggest such statutory actions to be performed by petitioner . Section 11 of the Act of 2015 deals with review of disciplinary action taken by Securities & Exchange and requires that the exchange shall immediately inform SECP in writing the name of securities and brokers and reasons for disciplinary actions and the amount of penalty imposed so that the Secretary Exchange Commission of Pakistan can review the disciplinary action. It is thus not a statutory penalty since no statutory regulation could be issued by petitioner . 16. The third response of Mr. Tariq Masood was in relation to an action of the Stock Exchange while charging fee which is construed by Mr. Hyder to be parallel to performing functions or sovereign functions of the State. Learned counsel to assist this Court has taken us to the two pronouncements in the cases of Province of Punjab as well as Khawaja Ahmed Tariq wherein the government functions and sovereign functions were defined. It is urged that listing fee is required to be paid by the company which intends to list itself on its securities or its securities to be treated on the security exchange. This is not recovered or collected under any statutory commands. The Act of 2015 does not confer any such power over the exchange as is in the case of Civil Aviation Authority (Supra) and SECP etc. The Karachi Stock Exchange was collecting such fee in terms of their internal regulations and not as a compulsory extraction under statutory powers and by its recovery petitioner is not rendered as an entity performing functions of State. 17. In response to Entry 6 of Part II of the Federal Legislative List, learned couns el for respondent submitted that the authority must be regulatory in nature and ought to have been established under the federal law i.e. all regulators established under federal law could be subjected to Entry 6 of Part-II of the Federal Legislative List whereas neither Karachi Stock Exchange nor Pakistan Stock Exchange was established by force under any of the federal statute and hence applicability of ibid Entry 6 is denied. 18. In response to Entry 30 of Part-I of Federal Legislative List regarding which legislation vest in the federation and hence provinces lack legislative competence, it is argued that principle of interpretation of entries in Federal Legislative List has been defined by different benches of this Court as well as by Hon'ble Supreme Court. The legislative work claimed to have been distributed through these entries between provincial and federal legislature. The entries in the current federal legislative list of the Fourth Schedule do not trans gress or encroach upon powers of other legislature. In this regard even learned counsel for respondent has relied upon the case of Civil Aviation Authority (Supra). It is claimed that neither federation nor provinces can trespass the rights of others or encroach legislative competence. 19. For the applicability of doctrine of mutuality , it is stated that Karachi Golf Club' s case, as relied upon, speaks of its applicability to Member 's club only and not to commercially active entity drawing economic benefit. It is denied to have acquired a status of club which could further be transacted/bisected into a member 's club. As regards,3 4
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services rendered by the Stock Exchange to companies, it is stated that their shares are listed on the stock exchange and are being charged initially for listing fee and annual rental fee. They also provide services to brokers and facilitate them in their business of providing brokerage services to general customers, investors, individuals etc. The stock exchange provides management services and charges fee for such management services, therefore, it is not conceivable that stock exchange provide services to its members only . 20. W e have heard the learned counsel for parties and perused material available on record. 21. The primary arguments of petitioner 's counsel are that the provinces lack competence in view of relied entries of Part-I and Part-II of Federal Legislative List of Fourth Schedule. Reliance is placed on Entries No.30 and 31 of Part-I of Federal Legislative List Fourth Schedule by relying on judgment of Civil Aviation Authority (Supra) and also Entry 6 of Part-II of Federal Legislative List. 22. Key points as evolves on account of submissions of the learned counsel are: A) Whether petitioner is a regulator within frame of Entry 6 of Part-II of Federal Legislative List? B) Whether Entry 30 and 31 of Part-I of Federal Legislative List of the Constitution could rescue petitioner in establishing incompetence of province to levy sales tax on services, which is catered by Entry 49 of Part-I of Federal Legislative List? C) Whether petitioner at all is a creation of Stock Exchanges (Corporatization, Demutualization & Integration) Act 2012 (Act 2012)? 23. In order to apply the effect of Act 2012 for the creation of stock exchange, we need to trace the history of stock exchange, as assisted by Mr . Tariq Masood, learned counsel. 24. The history of formation of stock exchanges as traced by him and to which no factual denial was made by Mr. Hyder is that Karachi Stock Exchange was formed by some individuals associating themselves as members and then by fulfilling the requirements of the then existing corporate law, for the purposes of their association, as disclosed in their Memorandum of Association, forming a company under the then existing corporate structure which is perhaps Companies Act, 1913. The said company was registered by the Registrar of Companies and it commenced its operation. It is thus a voluntary corporate creation by some of the associate members. Corporate creation and creation of an entity by statute (per force) itself is a subject addressed in this judgment. 25. The statutory creation, for the purposes of explaining above voluntary creation, are the creation of National Bank of Pakistan out of National Bank of Pakistan Ordinance 1949, Security Exchange Commission of Pakistan Act 1947 for the creation of Securities & Exchange Commission of Pakistan and Civil Aviation Authority Ordinance 1982 that establishes the Civil Aviation Authority etc. 26. An attempt was made to consider the Act 2012 at par with those of National Bank of Pakistan Ordinance 1949, SECP Act 1947 and Civil Aviation Authority Ordinance, 1982. In the Act 2012 there is nothing to subscribe that it is this Act which created the stock exchange, which was originally formed as a voluntary act of some of the members who got themselves into an association forming Karachi Stock Exchange. This Act (Act 2012) only provides for corporatization, demutualization and integration of stock exchanges in Pakistan. It enabled the conversion of a company limited by guarantee to company limited by shares and further caters for the amalgamation or integration of different companies of like nature which otherwise could have been done through an extended and complexed process provided by the Companies Ordinance, 1984, as it then prevailed. This was done under a uniform policy of the country since it was felt that there was no level playing field for the investors who were at disadvantageous position and the proper way out as found, was to de-mutualize the companies as followed internationally . Thus, Act 2012 has no provision for a fresh creatio n or registration of a new stock exchang e or new corporate entity which could be other than designated role as disclosed in their earlier Mem orandum of Association. No statutory/regulatory role/function or role of federation subscribed in the formation of demutualized company under Act 2012. 27. Act 2012 and its subsequent corporatization also did not affect the nature and legal status of the company . Act 2012 "Effect of Corporatizations" also identifies the above facts which have not been repeated for the sake of brevity . It was in fact promulgated to overcome the difficulties, shortcomings and cumbersome procedure for corporatization, demutualization and amalgamation.5
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28. An attempt has been made that SECP plays a pivotal role in the appointment of directors as considered in the case of Civil Aviation Authority ibid. 29. The role of SECP to appoint directors to fill casual vacancies on the Board of Directors and to appoint MD of Karachi Stock Exchange would turn nothing. It would not change the corporate structure of stock exchange. In a ten-member Board of Stock Exchange, five were appointed from amongst the members of the Company without any interference of SECP whereas five independent directors of the Board were appointed from amongst professionals in consultation with different professional organizations and none of them could be an employee of SECP or could have any interest based connection therewith. It is in fact to secure the independence of the Board of Directors rather than having control over it. The Board of Directors approves the proposal of Managing Director of the Board which is only approved by SECP and this was perhaps to monitor as to the whether MD fulfills the criteria for such appointment provided in the Memorandum. Such appointment of Managing Director is not to change the corporate entity of the stock exchange. 30. The emphasis of the petitioner 's counsel for the enforcement of Regulations in pursuance of Section 6 and 7 of the Act of 2015 and in consequence whereof the stock exchange said to have been performing regulatory functions of the government, we may take some assistance from the Act itself. 31. Section 2 of the Act of 2015 contains definitions and same are material for the purposes of present issue in hand. The same are as follows:- 2. Definitions.-- (1) In this Act, unless there is anything repugnant in the context or subject, (i) ........ (x) "Commission" means the Securities and Exchange Commission of Pakistan established under section 3 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997); (xlvi) "regulated market" means any securities exchange, over-the-counter market or platform that is licensed by the Commission; (xlix) "regulations" means regulations made by the Commission under this Act; (lv) "securities exchange" means a public company that is licensed by the Commission as a securities exchange under section 5; (lvii) "security market" means any mark et or place at which or any service or facility (whether electronic or otherwise) by means of which, offers of invitations to sell, purchase or exchange securities are regularly made on a centralized basis, being offers or invitatio ns that are intended or may reasonably be expected, to result, directly or indirectly , in the acceptance or making, respectively , of offers to sell, purchase or exchange securities; 32. Regulations as defined leaves no doubt that Act of 2015 recognizes regulations of Commission i.e. SECP , therefore wherever the word "Regulation" is used in Section 7 of ibid Act it is in its colloquial or liberal sense but not regulations under Act 2012. 33. Sections 160 and 161 of Act of 2015 are also reproduced for the sake of convenience:- 160. Penalty to be imposed by the Commission.--Wherever a penalty is provided for any offence, contravention of or default in complying with, any of the provisions of this Act, rules or regulations made under this Act, such penalty shall be imposed by the Commission after providing a reasonable opportunity of hearing to the party . 161. Appeal .--(1) Any person aggrieved by the final decision of the Commission may, within sixty days of the decision communicated to him, prefer an appeal to the Court. (2) The Court may, on an appeal made to it under sub-section (1), accept, set aside or vary the decision of the Commission or make such other order as the interests of justice require. Explanation.--For the purposes of sub-section (1), "final decision of the Commission" means a decision of the Appellate Bench of the Commission under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997). (3) The Court shall, at the stage of admission of the appeal or at any time thereafter on the application of the aggrieved person and after due notice to the Commission, decide by means of a reasoned order whether the appeal is to be admitted in part or in whole depending on the facts and circumstances of the case: Provided that
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the admission of the appeal shall not per se operate as a stay and nor shall any stay be granted therein unless the Commission has been given an opportunity of being heard. (4) Notwithstanding anything contained in any other law, the hearing of appeal shall continue day-to-day , unless sufficient cause has been shown by the parties jointly or severally which is beyond the control of the parties, the Court may adjourn the hearing for maximum of two dates and such adjournment shall not be more than fifteen days at any one time or for more than thirty days in all. (5) Where on third hearing any party fails to appear and address arguments before the Court the Court shall proceed and decide appeal on merits and it shall be deemed that such party has relinquished its rights to address arguments." 34. Section 160 of the Act of 2015 empowers SECP to impose penalty for violation of any "Regulation" made under the Act. Had the status of so-called Regulations issued (in pursuance of Section 7 ibid) been that of "Regulations" issued under the Act 2012, then Karachi Stock Exchange should have been named as an authority empowered to issue regulations in Section 2(xlix) ibid and also as an authority to impose penalty for violation of such regulations under section 160 of the Act of 2015. It thus establishes that the word "Regulations" as used in Section 7 in Act of 2015 is not in context of rendering/referring to any statutory regulations but merely internal regulations of stock exchange for carrying out daily business activities in transparent manner , as required by its regulator . 35. The other definitions such as "security exchange", "regulated market" and "securities market" available in Section 2 of Act of 2015 cumulatively yields that the definitions are of places where services are provided for commercial/economic activity and it is the commercial activity of the company itself which does not form either functions or sovereign functions of the State. Section 7 of Act of 2015 which deals with the regulations is to be read in connection with Section 5 of Act of 2015 as Section 7 itself makes reference to it which deals with the registration requirement. It is Section 5 subsection (4) that empowers the SECP to grant licence to a company for working as "securities exchange" provided that the SECP is satisfied as to the requirements. Section 5(5) further clarifies that while granting licence, SECP shall ensure that the company to whom licence is being issued has made satisfactory provision in its internal regulations for protection of customers to avoid conflict of interest and to provide level playing field by providing fair, transparent and efficient security market and prope r regulation and supervision to control influential entities in the market. 36. The cumulative effect would thus lead us to conclusion that the regulations of the securities exchange is only for regulating the company so that investors should know beforehand that Karachi Stock Exchange has put in place satisfactory arrangement for fair and transparent security market and free from conflicting interest. It is thus not those statutory regulations through which in normal way the official functions of the government are being performed. 37. Penalties imposed by securities exchange and by commission are of two different origin. There is no specific provision or definition under Act 2012 to enable forced penalty of the nature as…
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