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Petitioner: COMMISSIONER INLAND REVENUE VS Respondent: Messrs QUALITY TEXTILE MILLS LTD
Court Name: Sindh High Court Judge(s): Ghulam Sarwar Korai, Munib Akhtar Title: COMMISSIONER INLAND REVENUE vs Messrs QUALITY TEXTILE MILLS LTD Case No.: I.T.R.A. No,133 of 2011 Date of Judgment:2013-05-31 Reported As: 2013 PTD 2095 Result: Reference accepted
JUDGMENT
JUDGMENT ' MUNIB AKHTAR, J.---This reference application has been filed by the Department impugning the order of the Tribunal dated 7-1-2011. The question of law said by the Department to arise out of the impugned order (with respect, slightly reformulated) is as follows:-- "Whether in the facts and circumstances of the case the learned. Tribunal has correctly concluded that Rule 231 of the Income Tax Rules, 2002 is applicable to the taxpayer's case? The- question arises in relation to the tax year 2007 under the Income Tax Ordinance, 2001 ("2001 Ordinance"). 2. The taxpayer is a public company that is engaged 'in the manufacture and sale of cotton yarn. It output is partly exported and in part sold locally. Insofar as the exports are concerned, a certain amount is deducted by way of tax under section 154 of the 2001 Ordinance, from the foreign exchange proceeds received from foreign buyers. Section 154 is to be found in Division III of Part V of Chapter X of the 2001 Ordinance. Subsection (4) of section 154 provides that the tax so deducted is a final tax "on the income arising from the transactions referred to in this section". Subsection (1) of section 169 (which is in Division IV of the same Part) makes this section applicable, inter alia, to section 154, and its subsection (2) provides that such income shall not be chargeable to tax under any head of income in computing the taxable income of the exporter (clause (a)), nor shall any deduction be allowable for any expenditure incurred in deriving such income (clause (b)). This manner of taxation is usually referred to as the presumptive tax regime, or PTR. Thus, the export sales of the taxpayer are taxable under PTR. On the other hand, the income earned on its local sales is taxable under the ordinary provisions of the 2001 Ordinance. This is usually referred to as the normal tax regime or NTR.
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3. The question that has given rise to this reference application is the manner in which certain expenses incurred by the taxpayer are to be dealt with. The adjudicating authority (the Deputy Commissioner/TO-9, Audit Division, LTU, Karachi) took the position that those expenses were incurred in relation to export sales and could not therefore be taken into account at all in computing the taxable income on the local sales. The Department's case-was, and is, that section 67 read with Rule 13 of the Income Tax Rules, 2002 ("2002 Rules") was applicable. The taxpayer on the other hand contended that matter had to be dealt with in terms of Rule 231 of the 2002 Rules. It had filed its tax return for the tax year 2007 on such basis. The heart of the controversy is therefore whether Rule 231 is applicable to, the facts and circumstances of the present case. 4. Since the adjudicating authority took a view different from that of the taxpayer, he issued notice for amendment of the (deemed) assessment order. He sought to disallow and exclude export related expenses such as ocean freight, export development surcharge, clearing and forwarding expenses and those in relation to bills of exchange. The taxpayer resisted any such amendment, but the adjudicating authority was not satisfied with its answer. He held as follows with regard to the taxpayer's contention that Rule 231 was applicable:-- "Contention of the taxpayer has not been accepted as the learned ITAT in its judgment reported as 1999 PTD (Trib.) 3880; has adjudicated upon the provisions of sections 50(5A) and 80-CC read with CBR's Circular No,20 of 1992, no further deduction is to be made from the deemed income under subsection (1) of section 80-CC. However later on the learned ITAT in another case reported as 2003 PTD (Trib.) 1053 has realized that in their earlier judgment reported as 1999 PTD (Trib.) 3880 the provisions of Rule-216 and CSR's Circular No,5 of 2000 were not considered hence, it recalled their earlier orders in I.T.A. No,332/KB of 1998-99 dated 21-11-1998 reported as 1999 PTD (Trib.) 3880 I.T.A. No,1693/KB of 1998-99 dated 27-11-1999 and I.T.A. No,547/KB of 1999-2000 dated 10-2-2000 and consequently decided the issue under consideration vide Para-11 of their order dated 17-5-2001 reported as 2003 PTD (Trib.) 1053 as under: 'Referring to the leading judgment in this very case, we find that issue with regard to FOB/C&F value of export was not addressed specifically because Circular No,5 of 2000 had by then been issued. So in view of this Circular our judgment needs to be modified to the extent that FOB value of export, as per Rule 216, has to be considered for allocation of G.P. And pro-ratio of expenses, we therefore, following principle endorsed in this very case, but also keeping in view our decisions in I.T.A. No,547/KB of 1999-2000 dated 10-2-2000 and I.T.A. No,1693/KB of 1998-1999 dated as 27-11-1999, direct that at the first instance FOB value of export and ex factory price of local sales has to be worked out then ratio of such exports and local sales has to be determined and then such expenses have to be pro-rated which are otherwise not identical or bi-furcatable. All expenses relatable to export sales should be allocated to exports, all expenses relatable to local sales have to be allocated to local sales, and only expenses which are common or not clearly bifurcated, should be pro-rated in the ratio of FOB export/ex-factory local sales.' ' In view of above cited judgment of the learned ITAT, the contention of taxpayer is not tenable and thus it is rejected." 5. Being aggrieved by the aforesaid treatment, the taxpayer filed an appeal, which was however not accepted by the CIT (Appeals). As presently relevant, the appellate authority held as follows in her order dated 17-2-2009:-- "I have minutely gone through the made by the learned AR viz-a-viz the findings of the assessing officer on the issue of prorating the income/expenses between local sales and export-sales in the manner and method provided under rule 231 of the Income Tax Rules, 2002, it is noted that the computation of export profit were made exactly in the manner laid down in Rule 231 of Income Tax Rules, 2002, and the identifiable export expenses were also disallowed in other identical cases and confirmed by my Predecessor. The same treatment has also been upheld by my predecessor in his
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Order No,1 dated 7-8-2007, and by me in Order No,369 dated 25-9-2008, therefore, I am of the view that addition of Rs,1262,124, Rs,516348 and Rs,649,640 in respect of commission export (bill of exchange), export development expenses, forwarding expenses respectively being export related expenses clearly relates to FTR income and the same can-not be allowed against normal income which clearly warranted action under section 67 of Income Tax Ordinance, 2001 read with rule 13 of Income Tax Rules, 2002." 6.. The taxpayer preferred a further appeal to the Appellate Tribunal, and finally met with success. After a hearing at which the Department was not represented, the Tribunal by means of the impugned order observed and held as follows:- "6. The AR was specifically asked to explain the basic difference between the view point of the taxpayer and that of the department. It was explained that the basic difference is in the interpretation of Rule 231... [This Rule was reproduced and the Tribunal then continued; 7. The AR pointed out that as per clause (b) of sub-rule (3) of Rule 231 it is evident that the "total profit" means the "sale proceeds" of exported goods or local sale of goods sold locally. Rule 231 does not speak about any profit, but about allocation/proration of profit between the export and local sales on the ratio of total sales whereas the department on the other had interpreting the same as the profit as computed after disallowance of inadmissible expenses including identifiable export related expenses. The AR to further elaborate his contention drew our attention to para 9 of Circular No,14 of 1992 dated 1-7-1992 relating to "explanation of important provision of Income Tax" while explaining the provision of section 50(5A) which was inserted vide FO 1992. It was explained as under: "A new section '80CC' applicable from assessment year 1993-1994 has also been inserted providing for presumptive tax on income of exporters under which foreign exchange proceeds on account of export of goods by an exporter shall be deemed to be income of such exporter and tax deducted at source under the newly inserted section 50(5A) shall be deemed to be the final discharge of his tax liability on this income." 8. The AR contended that from the above para it is evident that the export proceeds received which had been subjected to WHT has been termed as income of the taxpayer. The AR further stated that in order to remove the ambiguity in Rule 231 which was deleted vide S.R.O. Dated 19-5-2009 was again inserted vide S.R.O. 58(1)/2010 dated 2-2-2010. The expression "total profit" as mentioned in clause (b) of sub-rule (3) in the earlier Rule 231 has been replaced and inserted Rule 231 as per clause (b) of sub-Rule (2) by the expression "total sales". 9. After considering the argument of both side, related circular and annex-IIG of the return we are of the considered opinion that the method of computation of income being adopted/ followed by the department in the presence of Rule 231 of I.T. Rule, 2002 is against the law due to the fact when identifiable export expenses are being disallowed under section 169(2)(b) for being related to export sales covered under section 169 then identifiable expenses related to local sales such as local freight expenses, salaries paid to salesman, advertisement expenses related to goods sold in Pakistan should also be allowed directly against normal law income and should not be prorated between export and local sales as per the practice of the department. 10. In our view Rule 231 does not speak of profit because this practice of disallowing only identifiable export expenses and not allocating identifiable local sales related expenses against normal law would be against natural justice. However, where income is computed after disallowing identifiable export related expenses and allowing identifiable direct expenses related to normal law sales, major expenses would become allowable against normal law income, which we are sure is not the intention of the legislature. 11. In view of the foregoing discussion and keeping in view of our earlier discussion given in I.T.As. Nos.1705 and 732/KB/10 of tax years 2005 and 2003 dated 4-1-2011 we are of the opinion that Rule
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231 of the I.T. Rules, 2002 speak of proration of profit on the basis of export/local sales ratio to total sales without disallowance of any identifiable export related expense or allowance of identifiable locally sale related expenses against normal law income, accordingly the contention of the AR is found to be correct, therefore the Assessing Officer is directed to allow all the expenses on prorate basis. This method has also been adopted in return of income made in Rule 34 read with Second Schedule of the Rules in Annexure-II-G." ' Being aggrieved by the aforesaid decision, the Department has filed the present reference application. 7. Learned counsel for the Department submitted that the Tribunal had seriously erred in law in concluding that Rule 231 was applicable. He submitted that the matter clearly fell within the scope of section 67, and Rule 13, which had been specifically framed to give effect to the provisions of that section. Indeed, subsection (2) thereof expressly empowered the Federal (formerly Central) Board of Revenue ("Board") in this regard. Learned counsel referred in particular to clause (ab) of subsection (1) of section 67, read with section 4(4)(b). Learned counsel submitted that the approach taken by the Tribunal in the impugned order was also contrary to the provisions of section 169(2)(b) since the Tribunal had, in effect, allowed expenditures incurred in relation to foreign sales to be taken into consideration contrary to the statutory provision. He submitted that the adjudicating authority and the CIT (Appeals) had come to the correct conclusions in law and their findings ought to have been sustained. He prayed that the question be answered in favour of the Department, and the impugned order be set aside. 8. Learned counsel for the respondent taxpayer strongly contested The Department's case. He submitted that the Tribunal had come to the correct conclusion in law on the facts of the case. Learned counsel took a preliminary objection that the question as proposed by the Department was not at all a question of law since no specific provision of the 2001 Ordinance had been identified therein, and the reference ought to be disposed off on this basis alone. Learned counsel submitted that Rule 231 was applicable and had been correctly applied. His case was that Rule 13 was a general provision, whereas Rule 231 was a special provision, which related specifically to export sales. Applying the principle of interpretation that the specific overrides the general, he submitted that Rule 13 could not be applied. Learned counsel took us to various provisions of the 2001 Ordinance, and to Rules 13 and 231. He submitted that it was an accepted position that the taxpayer did not keep separate books of account for export and local sales. Learned counsel further submitted that Rule 231 was in all material respects the same as Rule 216 that had been part of the repealed Income Tax Rules, 1982 ("1982 Rules"), which had been framed under the repealed Income Tax Ordinance, 1979 ("1979 Ordinance"). Reliance was placed on Circular 5/2000 that had been issued by the Board on 6-3-2000. This referred to the Board's earlier Circular 20/1992 dated 1- 7-1992, and then stated in material part as follows:-- "Queries have, however, been raised as to what would be the method of proration of profits between export proceeds falling under section 80CC and local sales. It is clarified that prorating of profits between export sales and local sales in respect of assessee maintaining books of account has to be done in accordance with Rule 216 of the Income Tax Rules, 2002." ' Learned counsel submitted that sections 50(5A) and 80CC of the 1979 Ordinance were in pari materia sections 154 and 169 of the 2001 Ordinance. Therefore, as made clear by the Board itself in relation to Rule 216 of the 1982 Rules, Rule 231 of the 2002 Rules had to be applied in the instant case and all such-like cases. Learned counsel prayed that the reference application be dismissed. 9. Exercising his right of reply, learned counsel for the Department submitted that the approach urged on behalf of the taxpayer would give it what was described as a "double dip" advantage. Learned counsel submitted that the subject matter of Rule 13 on the one hand and Rule 231 on the other was different and therefore the latter could not be regarded as a specific rule as opposed to
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the general rule contained in the former. It was submitted that Rule 13 related to expenditures, whereas Rule 231 related to profits earned. There was no equivalence between the two. 10. At the conclusion of the hearing, we allowed learned counsel to file written synopses along with the case-law they wished to rely upon. Learned counsel for the respondent filed a synopsis, referring therein also to certain case-law. 11. We have heard learned counsel as 'above, examined the record with their assistance and considered the case-law relied upon. We first take up the preliminary objection raised by learned counsel for the taxpayer. In our view, it cannot be accepted. The reference application does raise a question of law, and an important one at that. We have only slightly reformulated the proposed question in order to bring out the point in dispute with greater clarity. The issue of law involved was clearly understood and very ably articulated and argued by both learned counsel. We proceed therefore to a consideration of the case on its merits. 12. As noted, the heart of the controversy is whether Rule 231 is applicable or not. Learned counsel for the respondent has submitted that this rule is the same as Rule 216 of the 1982 Rules, and has relied on Circular 512000. It will be convenient to set out Rule 231 as applicable in the tax year 2007, and Rule 216, as it stood at the time of the repeal of the 1982 Rules. These rules were as follows:-- 231. Computation of export profits and tax attributable to export sales.---(1) Where a taxpayer exports any goods manufactured in Pakistan, the taxpayer's profits attributable to export sales of such goods shall
216. Computation of export profits and tax attributable to export sales.---(1) Where an assessee exports any goods manufactured in. Pakistan, his profits attributable to export sales of such goods shall be Be computed in the manner specified hereunder:- (b) in other cases, the profits of such business shall be taken to be an amount which bears to the total profits of the business of the assessee from the sale of goods, the same proportion as the export sales of goods manufactured in Pakistan hear to the total sales of goods.
(2) Where the total income of a taxpayer includes any profit from the export of goods manufactured in Pakistan, the tax attributable to such profits shall be an amount which bears to the tax payable on the income the same proportion as such profits bear to the total income.
(3) In this rule, unless there is anything repugnant in the subject or context:-
(a) "export sales" means the f.o.b. Price of the goods exported; computed in the manner specified hereunder:- ...
(b) in other cases, the profits of such business shall be taken to be an amount which bears to the total profits of the business of the assessee from the sale of goods, the same proportion as the export sales of goods manufactured in Pakistan bear to the total sales of goods.
(2) Where total income of an assessee includes any profit from export of goods manufactured in Pakistan, the tax attributable to such profits shall be an amount which bears to the tax payable on the total income the same proportion as such profits bear to the total income.
(3) In this rule, unless there is anything repugnant in the subject or context,--
(a) "export sales" means the f.o.b. Price of the goods exported;
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(b) "total profits" means:--
(i) the aggregate of export sales as determined under clause (a); and (ii) the ex-factory price of goods sold in Pakistan, where the goods exported out of Pakistan were manufactured by the exporter; or (iii) the ex-go down price of goods sold in Pakistan, in other-cases. (b) "total" means--
(i), the aggregate of export sales as determined under clause (a); and (ii) the ex-factory price of goods sold in Pakistan, where the goods exported out of Pakistan were manufactured by the exporter, or (iii) the ex-go down price of goods sold in Pakistan, in other cases. 13. Clearly, the two rules were essentially identical. To understand Rule 231, one can therefore begin with Rule 216. Why was Rule 216 framed? What purpose did it serve? The answer to this lies in the First Schedule to the 1979 Ordinance. Part I of this Schedule gave the rates of income tax, while Parts II and III gave the rates of super tax and surcharge respectively. We are concerned with Part IV. This Part underwent significant changes by way of amendments and substitutions during the life of the 1979 Ordinance. For our purposes, it is relevant to consider this Part as it stood from the promulgation of the 1979 Ordinance up to (but before) the Finance Act, 1997. Althought amendments were made to this Part from time to time even over this period, the basic structure remained as it was from the beginning and it is this structure that needs to be examined, because it explains the genesis of Rule 216. (From the Finance Act, 2007 on wards, Part IV took on a significantly different form.) We have chosen to look at Part IV as it stood up to the Finance Act, 1994, but this does not at all affect the substance of the analysis. 14. Part IV comprised of two paragraphs, A and B, of which we are concerned with the former (the latter simply contained certain definitions). Paragraph A, which applied "notwithstanding anything contained in [the First] Schedule", had a number of sub-paragraphs. All of these, in one way or another, gave relief from the income tax or super tax, not by way of an exemption, but by a reduction in the tax payable. For our purposes, it is sub-paragraph (2) that is relevant. This provided in material part as follows:-- "(2) Where the total income of an assessee includes any profit and gains derived from export of goods manufactured in Pakistan,--- (a) income tax and super tax, if any, payable in respect of such profits and gains shall... Be reduced by an amount equal to fifty per cent. Of the amount of income tax and super tax, if any, attributable to the sale proceeds of such goods. ' The Central Board of Revenue may make rules providing for the computation of profits and the tax attributable to export sales for the purposes of sub-clause (a) and for such matters as may be necessary to give effect to the provisions of this clause". ' (We have only reproduced that portion of sub-paragraph (2) as is necessary for explaining the reason why Rule 216 was framed.) 15. It will be seen that sub-paragraph (2) gave substantial relief in respect of any profits derived from the export of goods manufactured in Pakistan. The relief was that the income tax and super tax on profits as were attributable to the sale proceeds of exported goods stood reduced by fifty per cent. Obviously, for an assessee to obtain the benefit of this relief, the amount of profits and gains derived by him from the sale of exported goods had to be computed. For this purpose, the Board was expressly conferred a specific statutory power, in terms of the last portion of sub- paragraph (2), to frame the necessary rules. As it at once clear, Rule 216 was framed in exercise of the power thereby conferred, and specifically for the purposes of sub-paragraph (2) of paragraph A of Part IV of the First Schedule. This is also clear from sub-rule (1) of Rule 216. This provided that the profits to be attributed to the sale of exported goods were to bear the same proportion to the
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total profits as the export sales bore to the total sales. Once the profits had been computed, sub- rule (2) then provided that the tax attributable to such profits bore the same proportion to the total tax payable, as the said profits bore to the total income of the assessee. Thus (and finally), it was the tax so determined that stood reduced by fifty per cent, in terms as stated in sub-paragraph (2) of paragraph A of Part IV of the First Schedule. (It will be recalled that "total income" was a defined term in the 1979 Ordinance, which was the totality of the income on which tax was payable.) 16. It will be seen from the foregoing that Rule 216 served a specific purpose, and one that was entirely different from the matter at hand. Its inclusions in the 1982 Rules were the exercise of a statutory power expressly conferred on the Board for a specific purposes. In the context of that purposes, no question arose of any need for apportionment of expenditure's between export sales and local sales, for the good reason that such an exercise was simply not required. The purpose was only to identify that portion of the overall profits as were attributable to export sales, in order to enable the assessee to enjoy the benefit of the relief provided. 17. Section 50 of the 1979 Ordinance, which had a number of subsections, dealt with the deduction of tax at source. In 1992, a new subsection (5A) was inserted in this section. This was in part materia section 154 of the 2001 Ordinance, in that it required the deduction of tax at the specified rate from the export sale proceeds received by an exporter from foreign buyers. In the same year, section 80CC was also added to the 1979 Ordinance (with effect from assessment years 1993-94). This was in pari materia section 169 of the 2001 Ordinance. Section 80CC, in its subsection (1), deemed the export sale proceeds on which tax had been deducted under section 50(5A) to be the income of the exporter, and in subsection (2) provided that no deduction or allowance was permissible against the deemed income. Finally, subsection (3) provided than where the exporter had no income other than that from export sale proceeds, the tax deducted under section 50(5A) would be deemed to be the final discharge of his tax liability. 18.…
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