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Petitioner: STANDARD CHARTERED BANK (PAKISTAN) LTD. through Senior Manager (Taxation) VS Respondent: PAKISTAN through Secretary Finance (Revenue Division) and 3 others
Court Name: Sindh High Court Judge(s): Sadiq Hussain Bhatti, Munib Akhtar Title:STANDARD CHARTERED BANK (PAKISTAN) LTD. through Senior Manager
(Taxation) vs PAKISTAN through Secretary Finance (Revenue Division) and 3 others Case No.: I.T.R.A. No,340 of 2010 C.P. No,D-4123 of 2013 Date of Judgment:2016-08-29 Reported As: 2017 PTD 1585 Result: Order accordingly Judgment ORDER ' MUNIB AKHTAR, J.---These two matters, filed by the same taxpayer ("Petitioner"), a banking company incorporated under the laws of 'Pakistan, arise under the Income Tax Ordinance, 2001 ("2001 Ordinance"). The income tax reference application relates to the tax year 2008 and assails the order of the learned Appellate Tribunal dated 22.06.2010. The constitutional petition relates to the tax year 2012 and assails a show cause notice (to the extent presently relevant, i,e,, its para 1) issued to the Petitioner under section 122(5A) of the 2001 Ordinance. Learned counsel for the Petitioner submitted that the objection to the Petitioner's tax return (deemed assessment) taken in para 1 of the notice was based squarely on the aforementioned order of the learned Tribunal, and for this reason had prayed that the two matters be heard together. 2. The issue that arises is the proper interpretation and application of section 24 of the 2001 Ordinance. That section allows amortization (which is analogous to depreciation) and deduction, as a business expense, of the expenditure incurred by a taxpayer in acquiring or creating intangibles. The Petitioner seeks to amortize and hence expense certain goodwill that it claims to have acquired in terms shortly to be stated. The Department (whose view has been upheld by the Appellate Tribunal) denies that the Petitioner can lawfully do so and indeed questions whether goodwill is even an intangible within the meaning of subsection (11) of the section, where this term is defined. 3. Learned counsel for the Petitioner submitted that the Petitioner was incorporated on 19.07.2006 under the laws of Pakistan for purposes ' of taking over the Pakistan business of the Standard
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Chartered Bank (UK), which is part of the well-known multinational banking conglomerate, and also to acquire the business of the Union Bank Ltd. That was, at that time, a locally incorporated bank doing business in this country. The Petitioner is thus part of, and a subsidiary in, the Standard Chartered group, and the ultimate holding company appears to be Standard Chartered incorporated under the laws of England. As is well known, the Standard Chartered Bank has been operating in Pakistan for decades (in fact going back to well before pre-Partition days), but hitherto the banking business was being carried on as a foreign entity doing business through Pakistani branches. Explaining the transaction, learned counsel submitted that in the first instance, on or about 05.09.2006, the Petitioner acquired 95.37% of the shares of Union Bank. Thereafter, there was a tri-partite amalgamation duly sanctioned by the State Bank of Pakistan under section 48 of the Banking Companies Ordinance, 1962. The amalgamation was of the Pakistan branches of the Standard Charted Bank, the whole of the business of the Union Bank and the Petitioner, and resulted in the Petitioner being the entity that thenceforth (from 30.12.2006) carried on the banking business that had earlier been conducted by the former two entities, separately and each in its own respective right (although of course since 05.09.2006. Union Bank was a subsidiary of the Petitioner). Learned counsel referred to the relevant clauses of the Scheme of Amalgamation that had been sanctioned by the State Bank, and to the latter's order, dated 04.12.2006, under section 48. Learned counsel submitted that the banking business of Union Bank had been acquired as a going concern, and at a premium on account of the goodwill associated with that business. It was submitted that the goodwill was an asset in its own right and in this regard reference was made to various legal material. Learned counsel principally relied on a judgment of the Supreme Court reported as Dr. M.B. Ankalsaria v. Commissioner of Wealth Tax Karachi 1992 SCM R 1755 ("Ankalsaria"). On such basis it was submitted that the goodwill was an "intangible" within the meaning of section 24(11) and the Petitioner was therefore entitled to amortize and expense it in terms as made permissible thereby. Learned counsel further submitted, relying on International Financial Reporting Standard No, 3 ("IFRS 3") that as required in terms thereof, the goodwill of the business acquired was duly reflected in the Petitioner's books of account, and this represented the cost of the goodwill for purposes of section 24. It was submitted that the learned Tribunal had erred in coming to the conclusion that section 24 was not applicable in the facts and circumstances of the Petitioner's case. The impugned order was not sustainable in law. The show cause notice in relation to the tax year 2012 as presently relevant, inasmuch .As it was based squarely on the impugned order, was likewise liable to be set aside. It was prayed accordingly. 4. Mr. Sarfraz Metlo, who appeared for the Department in the constitutional petition, submitted that the "goodwill" being claimed by the Petitioner did not fall within the definition in section 24. In particular, learned counsel submitted that goodwill was not specifically listed therein and was not property or a right "like" the enumerated categories. It was submitted that nothing intangible had been acquired by the Petitioner. All that it had was the assets of the Union Bank and nothing else. The Petitioner was merely attempting to put a value on the physical assets (which were manifestly not intangible) and force the result into the definition given in section 24. Learned counsel submitted that goodwill, if at all relevant for purposes of the definition, was something that had to be generated or created by the taxpayer or some person from whom the taxpayer acquired it, and nothing of the sort had happened in the present case. The definition was restrictive, using the word "means", which was decisive. Learned counsel relied on certain case law in support of his submissions. 5. Mr. Kafeel Abbasi, who appeared for the Department in the tax reference, referred to the impugned order of the learned Tribunal and submitted that the law had been correctly stated and applied therein. Learned counsel submitted that section 24 did not at all apply in the facts and circumstances of the case. It was emphasized that it was the Petitioner, and not the UK entity that
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had acquired the shares of Union Bank. The latter had been de-scheduled by the State Bank on account of the merger. Learned counsel also submitted that when the Petitioner had acquired the 95.37% shareholding of Union Bank, it (the Petitioner) had itself regarded and characterized the transaction as capital gains. In this regard, it was submitted that some of the shareholders from whom shares were acquired were non-residents and the Petitioner would have been obliged to withhold tax from the remittance of consideration to them, in terms of section 152. However, the Petitioner had itself applied for an exemption in this regard, relying on clause (110) of Part I of the Second Schedule to the 2001 Ordinance. That applied only in relation to capital gains. The Petitioner could not now turn around and claim that it had acquired "goodwill" and then seek to amortize and expense the same under section 24. It was submitted that the Petitioner's claim was wholly unmeritorious. 6. Dr. Najeeb Ahmed, Additional Commissioner Inland Revenue also made submissions with our permission, and we would like to record our appreciation of the assistance provided to the Court. The learned Additional Commissioner also filed a detailed synopsis of his submissions supported by various documents that was invaluable in understanding the Department's case. Explaining the transaction, the learned Additional Commissioner submitted that on 05.09.2006, 95.37% of the shareholding of Union Bank (representing around 323 million shares out of a total of approx. 338 million) was acquired by the Petitioner for a total sale consideration of (approx.) Rs, 30.8 Billion. Out of this amount, Rs, 17.588 Billion had to be remitted to non-resident shareholders (who held around 57% of the shares being acquired). The Petitioner would have had to withhold a certain amount (by way of tax) under section 152 but it applied for an exemption certificate, basing its claim on the aforementioned clause (110). Thus, it was the Petitioner's own case that its acquisition was nothing other (or more) than a capital investment, and Union Bank thereafter simply became a subsidiary of the Petitioner. The learned Additional Commissioner submitted that the acquisition of the shareholding was in fact funded by the Standard Chartered Bank (UK). The latter had given a loan of (approx.) Rs,29.397 Billion to the Petitioner for this purpose. After the shares had been acquired, the Petitioner's balance sheet showed a long term investment (the Union Bank shares) on the credit side, and the loan from its parent entity on the debit side. (We may note that a great deal of emphasis was laid on this aspect, i,e,, that the acquisition was nothing but capital gains, both by learned counsel appearing for the Department, and the learned Additional Commissioner.) The learned Additional Commissioner also submitted that the Petitioner issued approx. 2.9 Billion shares to the UK entity, which settled' the loan amount. When amalgamation took place, the 95.37% shares held by the Petitioner in Union Bank were cancelled (per clause 9(1) of the Scheme of Amalgamation). The few remaining third party shareholders (holding 4.63% of the shares) were allotted shares in the Petitioner at a swap ratio of 2.5:1. The learned Additional Commissioner submitted that if there was any goodwill involved in the transaction/transfer (which was not admitted) that was already factored into the share price and the consideration paid by the Petitioner on 05.09.2006. It was submitted that the Petitioner characterized the difference between the fair market value of the assets of Union Bank and the price paid for them as "goodwill". ' However, it was submitted that in reality, this was an indeterminate number, which could be settled at wh atever value suited the buyer and seller. In other words, it was contended that the so- called "goodwill" was nothing but an artificial construct, created only as a result of accounting legerdemain. In this regard, the learned Additional Commissioner carried out a detailed analysis, in "economic terms", of the transaction (para 4 of the written synopsis) and characterized the claimed goodwill as nothing but part of an "aggressive tax avoidance strategy". 7. The learned Additional Commissioner also submitted that even if at all any goodwill were involved, the transaction was carried out on a tax neutral basis, and in this regard relied on sections 97 and 97A of the 2001 Ordinance. Referring to clause (62) of Part IV of the Second
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Schedule, it was submitted that this was inserted on 29.08.2006, i,e,, only a few days prior to the acquisition of the shares of Union Bank. It was submitted that if the foregoing provisions did not apply, the Standard Chartered Bank (UK) would have been liable to tax on the goodwill of its Pakistan business. However, the Petitioner would still not be able to claim the goodwill in respect of the Union Bank acquisition and amortize and expense the same. Referring to section 24(11), and the definition of "intangible", it was submitted that goodwill did not come within the scope thereof. It was an intangible of a nature different from that of the types enumerated in the definition. The learned Additional Commissioner submitted that goodwill was simply the "habit" of consumers and customers to return to a business and it could arise from various factors, some of which were described during arguments and also set out in the written synopsis. It was further submitted that the treatment of the" excess paid over the fair market value of the assets of Union Bank, as' per IFRS 3, also did not advance the Petitioner's case. Reference was also made in this regard to the concept of "impairment" of goodwill, and to the requirements of IAS 36. It was also submitted that the value of the claimed goodwill had not in any case been properly computed in accordance with law. On the foregoing basis, it was submitted that the Petitioner had no case, and it was prayed accordingly. 8. Exercising his right of reply, learned counsel for the Petitioner submitted that the definition of intangible included a license and in this regard; referring to various documents on the record, submitted that the Petitioner had acquired the branch operating licenses of Union Bank as part of the acquisition. Reference was also made to the last part of the definition, and it was submitted that on any view of the matter, goodwill was included in the definition. Learned counsel also filed a written synopsis, as did Mr. Sarfraz Metlo, learned counsel for the Department. 9. We have heard learned counsel and the learned Additional Commissioner, considered the record and the written synopses filed, and reviewed the case law and other legal material relied upon. In our view, the issues raised can be formulated as the following questions, which can also be regarded as the questions of law arising out of the impugned order of the learned Tribunal:-- a. Is goodwill an intangible within the meaning of the definition given in section 24(11)? b. Whether, in the facts and circumstances of the present case, the Petitioner acquired any goodwill within the meaning of section 24? c. Whether, in the facts and circumstances of the present case. The Petitioner is entitled to amortize and expense any goodwill in terms of section 24? 10. We first set out section 24, to the extent presently relevant. The section was in the terms as given below for both the tax years in question:-- "24. Intangibles. ---(1) A person shall be allowed an amortisation deduction in accordance with this section in a tax year for the cost of the person's intangibles- (a) that are wholly or partly used by the person in the tax year in deriving income from business chargeable to tax; and (b) that have a normal useful life exceeding one year. (2) No deduction shall be allowed under this section where a deduction has been allowed under another section of this Ordinance for the entire cost of the intangible in the tax year in which the intangible is acquired. (3) Subject to subsection (7), the amortization deduction of a person for a tax year shall be computed according to the following formula, namely:- ' where - ' A is the cost of the intangible; and ' B is the normal useful life of the intangible in whole years. (4) An intangible - (a) with a normal useful life of more than ten years; or
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(b) that does not have an ascertainable useful life shall be treated as if it had a normal useful life of ten years. (7) The total deductions allowed to a person under this section in the current tax year and all previous tax years in respect of an intangible shall not exceed the cost of the intangible. (10) For the purposes of this section, an intangible that is available for use on a day (including a non-working day) is treated as used on that day. (11) In this section, --- "cost" in relation to an intangible, means any expenditure incurred in acquiring or creating the intangible, including any expenditure incurred in improving or renewing the intangible; and "intangible" means any patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, licence, intellectual property, or other like property or right, contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land)." 11. We begin with the first question. We have carefully considered the legal material relied upon by both sides and the submissions made. In our view, the question is conclusively determined by the judgment of the Supreme Court in Ankalsaria and therefore, without intending any disrespect, we will not (save with regard to one case) consider in detail the other material. The appeal in Ankalsaria arose under the (late) Wealth Tax Act, 1963 ("1963 Act"). The principal judgment was delivered by Sajjad All Shah, J. (as his Lordship then was). Ajmal Mian, J. (as his Lordship then was) agreed and gave a concurring judgment. The appellant ran a successful nursing home in Karachi. In assessing his liability to pay wealth tax, the taxing authority added the value of the goodwill of the business (as computed by the authority) to the appellant's assets. The assessee appealed to the appellate authority on the ground, inter alia, that goodwill was not an asset within the meaning of that term as given in 'section 2(e) of the 1963 Act. The appeal was allowed. (There was in fact more than one appeal since a number of assessment years were involved, but nothing turns on that.) The Department appealed to the Tribunal, which was dismissed. The Department filed a reference in this Court, and it was held that goodwill was indeed an (intangible) asset within the scope of the 1963 Act. The assessee appealed to the Supreme Court. In the principal judgment, a number of different authorities were referred to, including Black 's Law Dictionary and Salmond on Jurisprudence, and a decision of the House of Lords reported as Commissioners of Inland Revenue v. Muller & Co's Margarine Ltd. [1901] AC 217. Extracts were cited with approval from these authorities and others, and it was held as follows (pg. 1764):-- "It is, therefore, manifestly clear and further there is no dispute about it, in the light of what is stated above, that goodwill is incorporeal property in the class of patents, copyrights and trade-marks and as such is movable property and is therefore, caught within the definition of "assets" including property of every description movable or immovable as contemplated under section 2(e) of Wealth Tax Act, 1963." ' Ajmal Minn, J. Expressly agreed that "'goodwill', being incorporeal property, is susceptible to be included within the definition of 'assets' given in section 2(e) of the Wealth Tax Act, 1963" (pg. 1769). 12. No doubt the definition of "assets" in the 1963 Act was broadly worded and inclusive whereas, as learned counsel for the Department and the learned Additional Commissioner were at pains to point out, the definition of "intangible" in section 24 is restricted and specific. Be that as it may, the traditional affinity between wealth tax law and income tax law cannot be denied. Thus, to take but one example, income tax law has long required that taxpayers file a wealth statement, setting out their assets and liabilities in detail; such an exercise was of course central to the charge of wealth tax. In our view, for present purposes, the definition of "intangible" can be set out as follows: "'intangible' means any patent, ... Copyright, trade mark, ... Or other like property or right ...." When so
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stated, its resemblance to what was observed in Ankalsaria, in the extract given above, is striking. That observation, it is to be noted, was made in strong terms: that what was being stated was "manifestly clear", and not open to any dispute. In our view, it is hardly arguable that if (as held by the Supreme Court) goodwill is incorporeal property of the same "class" as patents, copyrights and trade-marks, it is not property or a right that is "like" them. The judgment of the Supreme Court is conclusive and determinative. We are therefore in no doubt that the first question must be answered in the affirmative. 13. While the foregoing clearly concludes the first point, for purposes of completeness we would like to refer to a judgment of the Indian Supreme Court relied upon by learned counsel for the Petitioner. This is the decision reported as Commissioner of Income Tax Kolkota v. Smifs Securities Ltd. (2012) 348 ITR 302. The Court was there concerned with section 32 of the (Indian) Income Tax Act, 1961, which deals with depreciation. The third explanation to subsection (1) (which allows for depreciation) defines "assets" in its clause (b) as meaning "'intangible assets', being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial' rights of similar nature". The resemblance with the definition in section 24 is obvious. The question, whether goodwill came within the meaning of "intangible assets". Was answered in the affirmative, the Court observing as follows:-- "8. A reading the words 'any other business or commercial rights of similar nature' in Clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a cimilar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). 9. In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act." ' It may be noted that learned counsel for the Department and the learned Additional Commissioner, in support of their interpretation of the definition of "intangible", relied on the rule of ejusdem generis as excluding goodwill from the definition. However, the Indian Supreme Court, while considering a similarly worded definition has used that same rule as including goodwill in the definition. We respectfully agree with the view adopted by the Indian Supreme Court. Thus, although the issue was approached from different perspectives, the same conclusion has been arrived at in India as found favour with the Supreme Court in Ankalsaria. 14. We turn to the other two questions, which can be taken up together. The first point to note is the great stress that was laid on behalf of the Department on the "capital gains" issue. It would not be too far wrong to say that learned counsel and the learned Additional Commissioner regarded this point as virtually conclusive against the Petitioner. It will be recalled that the submission arose on the basis of the purchase of 95.37% shares of Union Bank by the Petitioner on 05.09.2006. Rs, 17.588 Billion had to be remitted to non-resident shareholders (who held around 57% of the shares being acquired). The Petitioner would have had to withhold a certain amount (by way of tax) under section 152 but it applied for an exemption certificate, basing itself on clause (110) of Part I of the Second Schedule. That clause, since omitted, exempted tax on capital gains made on the sale of, inter alia, shares of listed companies. The Petitioner would have been under an obligation to deduct tax in terms of section 152(2), but sought an exemption under subsection (3). This, it was submitted, was conclusive against it, in that the Petitioner regarded the transaction as being one of capital gains. Once the Petitioner itself so regarded the transaction, it was contended, it could not then turn around and claim an amortization deduction under section 24. The learned Tribunal also observed, with reference to the exemption certificate, that the Petitioner had "never surrendered its claim" to it, and held that this also established that "it [was] due to an afterthought that the taxpayer [had] resorted to colouring of the transaction in a manner that [suited] its objective of avoiding the tax" (see para 9 of the impugned order). With respect, these observations and the
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submission, are misconceived. The capital gains, if any, were made by the sellers of the shares and not the Petitioner, which was the buyer. Section 152(3) states, in its clause (d), that subsection (2) does not apply "where the non-resident person is not chargeable to tax in respect of the amount". It was the non-resident sellers; and not the Petitioner, who were entitled to the benefit of the aforementioned clause (110), and since on account thereof there was no obligation to withhold tax the Petitioner applied accordingly. But it would be erroneous to conclude from this that the transaction constituted capital gains insofar as the Petitioner was concerned. It patently did not, for the simple reason that no such gains accrued to the Petitioner. It is also well settled in income tax law that a payment may take one color when viewed from the perspective of one party and an altogether different color when viewed from the perspective of another. The point has been stated thus in Kanga & Palkiwala's The Law and…
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