PLJ 2024 Peshawar (Note) 49
Present: Shakeel Ahmad and Syed Arshad Ali, JJ.
M/s. CGGC-DESCON JOINT VENTURE through authorized signatory Joint
Venture, Descon Engineering Company, Lahore--Petitioner
versus
FEDERATION OF PAKISTAN
through Secretary Ministry of Finance, Islamabad and 3 others--Respondents
W.P. No. 4346-P of 2019,
decided on 30.1.2023.
Income Tax Ordinance, 2001 (XLIX of 2001)--
----S.
9--Constitution of Pakistan, 1973, Art. 199--Joint venture agreement--Bid was
accepted--Acceptance letter--Claim for exemption from income
tax--Refused--Appeal--Dismissed--No verification of JV Office in Fata--No
authority of WAPDA--JV had allegedly subsequently established said place of business
but relevant officer of respondent as evident from when visited said place, he
could not find any place of business of petitioner; this being purely a
question of fact cannot be decided by High Court in its limited jurisdiction--It
was income of partners of JV which was subject to incidence of taxation and
both members of JV were resident of settled area as one had registered office
at Lahore and other is Foreign Company having office at Islamabad--WAPDA had no
authority either to committed with contractor or to allow contractor to claim
exemption from statutory taxation--Ignorance of law is no excuse for a person
that he would not be subject to penal or taxing laws of State--Petition
dismissed.
[Para
23, 24 & 25] A, B & C
2017 PTD 1561 ref.
Mr. Isaac Ali Qazi, Advocate for Petitioner.
M/s. Sanaullah, DAG, Shakirullah Afridi & Mukhtar
Ahmad Maneri, Advocates for Respondents.
Date of hearing: 30.1.2023.
Judgment
Syed Arshad Ali, J.--On 25th May, 2018, a joint venture
agreement under the name & style of M/s CGGC-Descon Joint Venture (“JV”) was inked between China Gezhouba
Group Company Limited, a corporation registered under the Laws of People’s
Republic of China having registered office at China Wuhan City (hereinafter
referred to as Foreign Company) and
Descon Engineering Limited; a company incorporated under the Company Laws of
Pakistan having Head Office at Ferozpur, Lahore (hereinafter referred to Local
Company). As evident from the, JV,the object of this agreement was to offer a
joint bid for the project, namely, Construction of Civil Works including,
Design, Supply and Installation of Electrical and Mechanical Works and
Hydraulic Steel Structures for Mohmand Dam Hydropower Project to Pakistan Water
& Power Development Authority (“WAPDA”)
being the employer. Article-III of the JV describes the shares of the
respective companies at the ratio of 70% and 30%; whereas Article-VI of the JV
envisages that the project will be managed through a Project Implementation
Office lead by the Project Manager appointed by the Lead Partner. The said
Nominated Project Manager shall be authorized to deals with the
employer/Engineer regarding all matters related with and/or arising out of the
performance of the contract on behalf of the JV in consultation with Project Implementation
Officer.
2. The bid of JV was accepted by the Employer/WAPDA through
letter of acceptance dated 07.03.2019 addressed to the Lead Foreign Company at
its office situated at House No.01, F-6/2 Hill Road, Islamabad (Pakistan).
Pursuant to the aforesaid letter of acceptance, a formal agreement was executed
between the employer/WAPDA and the JV. It is one of the claim of the petitioner
for exemption from taxes that the contract document executed with the employer
i.e. clause-14.1 clearly envisages that the contractual income of the contract
of the contractor is not subject to Income Tax Ordinance, 2001 and Sales Tax
Act, 1990 on service.
3. The JV applied for registration with the Federal Board of
Revenue and on 22.05.2019 accordingly the JV was registered having registration
No. 5387927. In the said application for registration as well as the
registration certificate, the address of the JV is provided as Moza Patti Banda
Tehsil Pandyali, Mohmand District Khyber Pakhtunkhwa, Mohmand. The JV had also applied
for exemption from income tax through a proper application. The said exemption
was refused by the Commissioner Income Tax on the ground that when the
representative of the revenue department had visited the alleged office
situated at Moza Patti Banda, it could not be verified as the JV was not
physically present at the said address. The petitioner has also appended an
agreement whereby certain properties were obtained on lease from locals which
is situated in Mohmand Agency, the erstwhile Federally Administered Tribal Area
(“FATA”).
4. Appeal against the order of Income Tax Officer was dismissed
by the Commissioner Inland Revenue vide order dated 7.5.2019.
5. The learned counsel representing the petitioner while
referring the law laid down by the Hon’ble Apex Court in the case of Pakistan
through Chairman FBR and others vs. Hazrat Hussain and others (2018 SCMR
939) has argued that there was complete immunity from payment of all taxes to
all the persons who were resident of the erstwhile FATA and on promulgation of
25th amendment in the Constitution when normal taxation laws were extended to
the erstwhile FATA, the income of all the persons including the companies who
were residing in the erstwhile FATA were exempt from payment of income tax
through SRO 1213(1)/2018 dated 5.10.2018, therefore, the impugned order whereby
exemption was refused to the petitioner on its income albeit on the payment
which the petitioner/JV would receive from WAPDA against the project’s income.
6. Against that, M/s Sanaullah DAG, Ghulam Shoaib Jally &
Mukhtar Ahmad Maneri, Advocates have strongly stressed that the address given
in the application for registration though relating to the project office when
verified, there was no physical presence of the JV in the erstwhile FATA as the
JV is operating from Islamabad and thus is not entitled to any exemption. The
respondents in their arguments have also relied upon the judgment of the Apex
Court in the case of Hasnain Cotex Limited vs. Commissioner Inland Revenue,
Lahore (2017 PTD 1561).
7. Arguments heard and record perused.
8. The gamut of the arguments of the learned counsel for the
petitioner is that since the JV being a person in terms of Section 80 Income
Tax Ordinance, 2001 (“Ordinance”) is physically located in the
erstwhile FATA therefore, is entitled for exemption of the income tax. In order
to appreciate the said arguments of the learned counsel for the petitioner, we
would like to refer to the brief history of the applicability of the Tax Laws
to the erstwhile FATA.
BACKGROUND OF IMMUNITY FROM TAXES
FOR THE INDIVIDUALS/PERSONS/COMPANIES ETC LOCATED IN THE ERSTWHILE FATA
9. Prior to the 25th amendment in the Constitution through Act
No. XXXVII of 2018 dated 05.06.2018, there was a separate
dispensation/mechanism for extension of laws to the erstwhile FATA. The
relevant provision of the Constitution i.e. Article 247(3) for ease reference
is reproduced as under:
“247 (3). No Act of
[Majlis-e-Shoora (Parliament) shall apply to any Federally Administered Tribal
Area or to any part thereof, unless the President so directs, and no Act of
[Majlis-e-Shoora (Parliament)] or a Provincial Assembly shall apply to a
Provincially Administered Tribal Area, or to any part thereof, unless the
Governor of the Province in which the Tribal Area is situate, with the approval
of the President, so directs; and in giving such a direction with respect to
any law, the President or, as the case may be, the Governor, may direct that
the law shall, in its application to a Tribal Area, or to a specified part
thereof, have effect subject to such exceptions and modifications as may be
specified in the direction”.
10. There remained a judicial consensus that the Income Tax as
well as Sales Tax Laws were never extended to the FATA, prior to the
promulgation of 25th amendment thereby omitting Article 247 from the
Constitution. However, there has been a long standing dispute between the
Federal Board of Revenue (“FBR” and the trade community/business community of
erstwhile tribal area regarding the imposition of income tax as well as sales
tax on the import of raw material for the manufacturing units, which were
located in the erstwhile FATA. This Court in its celebrated judgment authored
by his Lordship Justice Yahya Afridi as he then was in the case of Messrs
Taj Packages Company (Pvt) Ltd through Manager vs. The Government of Pakistan
through Federal Secretary Finance and Revenue Division and 6 others (2016
PTD 203), has elaborately dealt with the issue of taxing the raw material/goods
which were imported for the purpose of its consumption in the erstwhile FATA.
The said judgment was also approved by the august Supreme Court of Pakistan in
the case of Pakistan through Chairman, FBR and others vs. Hazrat Hussain (2018
SCMR 939), wherein it has been unequivocally held that the business
concerns/manufacturing units located in the PATA are immune from the impost of
both, the income tax as well as sales taxes; that similarly, the goods or
machinery, which they are importing for their home consumption are equally
immune from the impost of both taxes at the import stage, however, in order to
ensure that the consumption of goods do not cross the limits of non-tariff
area, the petitioners have to provide a security in form of post-dated cheques
equal to the value of the imported goods.
11. The aforesaid immunity was available to the
persons/corporate entities located within the erstwhile area of PATA as in view
of the legal barrier of Article 247 of the Constitution; the provisions of the
Ordinance were not extended to the erstwhile FATA.
12. Upon promulgation of the 25th Constitutional Amendment Act,
2018 on 24.5.2018, this legal barrier in form of Article 247 of the
Constitution was erased and, thus, the provisions of the Ordinance became
applicable to all the persons/corporate entities located within the territory
of erstwhile FATA, as such, their income was subject to imposition of income
tax under the Ordinance.
13. After 25th amendment in the Constitution, the trade
community had raised voice for continuance of the said exemption from
imposition of income tax and sales tax. The Federal Government through SRO 1212
(1)/2018 dated 5.10.2018 and SRO. 1213(1)/2018 dated 05.10.20218 had allowed
the said exemption to the resident/ domicile of the erstwhile FATA/PATA.
14. The Ordinance provides both; the provisions of charging as
well the mechanism for collection of tax whereas the word ‘income’ is defined
in Section 2(29) of the Ordinance as:
“(29) “income”
includes any amount chargeable to tax under this Ordinance, any amount subject
to collection or deduction of tax under section 148, 150, 152(1), 153, 154,
156, 156A, 233, 233A, subsection (5) of Section 234 and any amount treated as
income under any provision of this Ordinance and any loss of income.”
Chapter II of the Ordinance deals with
the charging provisions whereas Part I of Chapter III explains taxable income,
total income and heads of income. Chapter X of the Ordinance envisages for
procedure of filing of return/assessments adjudication of claims as well as
recovery of income tax dues. The mechanism for deduction and collection of
advanced tax is provided in Part V of Chapter X of the Ordinance. The Division
IV of the said chapter relates to grant of exemption from total income tax or
issuance of lower rate certificate.
15. Section 53 of the Ordinance empowers the Federal Government
not only to grant exemption to any person or class of persons from the payment
of income tax but can also exempt/partially exempt any person from the
application of the Ordinance. For convenience, Section 53 is reproduced as
under:
“53. Exemptions and
tax concessions in the Second Schedule.-(1) The income or classes income, or
persons or classes of persons specified in the Second Schedule shall be-(a)
exempt from tax under this Ordinance, subject to any conditions and to the
extent specified therein; (b) subject to tax under this Ordinance at such
rates, which are less than the rates specified in the First Schedule, as are
specified therein; (c) allowed a reduction in tax liability under this Ordinance,
subject to any conditions and to the extent specified therein; or (d) exempted
from the operation of any provision of this Ordinance, subject to any condition
and to the extent specified therein.”
16. Section 80 of the Ordinance, envisages that association of
persons includes a firm, a Hindu undivided family, any artificial juridical
person and anybody of persons formed under a foreign law but does not includes
a company.
17 Section 92 of the Ordinance envisages for principal of
taxation of association of persons which reads:
“An association of
persons shall be liable to tax separately from the members of the association
and [where the association of persons has paid tax the] amount received by a
member of association in the capacity as member out of the income of the
association shall be exempted from tax.”
18. Reverting back to the legal issue involved in the present
case; as stated above, when on the promulgation of 25th amendment in the
Constitution, the provisions of Ordinance became operative in the erstwhile
FATA, the Federal Government pursuant to their commitment with the
people/residents of erstwhile FATA/PATA issued SRO No. 887-1 of 2018 on
08.7.2018 thereby granting exemption to the individuals/corporate entities
domiciled/resident of erstwhile FATA/PATA from the payment of income tax. Later
the afore-said SRO was substituted by SRO No. 1213, which read as under:
Government
of Pakistan
Revenue Division
Federal Board of Revenue.
Islamabad,
the 5th October, 2018
NOTIFICATION
(Income
Tax)
S.R.O. 1213(1)/2018.--WHEREAS
prior to the Constitution (Twenty-fifth Amendment) Act, 2018 (XXXVII of 2018),
the Income Tax Ordinance, 2001 (XLIX of 2001) was not in force in the Tribal
Areas as defined in Article 246 of the Constitution of the Islamic Republic of
Pakistan, hereinafter called as the Constitution, and the levy of income tax
was not attracted to the said Tribal Areas;
AND WHEREAS Article 247 of the
Constitution stood omitted on commencement of the Constitution (Twenty-fifth
Amendment) Act, 2018) XXXVII of 2018) with effect from 31st day of May, 2018
and the Federally Administered Tribal Areas (FATA) and Provincially
Administered Tribal Areas (PATA) stood merged in the Provinces of Khyber
Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the
Constitution.
AND WHEREAS on commencement of the
Constitution (twenty-fifth Amendment) Act, 2018 (XXXVII of 2018), the Income
Tax Ordinance, 2001 (XLIX of 2001) is in force in the said Provinces including
the erstwhile Tribal Areas forming part thereof;
AND WHEREAS a phased approach was
needed for the full application of fiscal laws to the said erstwhile Tribal
Areas, a decision was made to exempt all persons from levy of income tax which
was not applicable to the said areas by virtue of said Article 247 and
accordingly Notification No. S.R.O. 887(1)12018, dated the 23rd July, 2018, was
issued by the Federal Government granting exemption from income tax as
aforesaid;
AND WHEREAS concerns were raised by
the trading community of the said erstwhile Tribal Areas to the effect that the
aforesaid Notification did not restore the position as existed prior to the
commencement of the Constitution (twenty-fifth Amendment) Act, 2018 (XXXVII of
2018);
NOW THEREFORE in order to address the
concerns so raised and to restore the position in relation to levy of income
tax to the said erstwhile Tribal Areas, and in exercise of the powers conferred
by sub-section (2) of section 53 of the Income Tax Ordinance, 2001 (XLIX of
2001), the Federal Government is pleased to direct that the following further
amendments shall be made in the Second Schedule to the said Ordinance, namely:-
In the aforesaid Schedule--
(a) In Part--
(i) Clauses (144)
and (145) shall be omitted; and
(ii) after clause
(145), omitted as aforesaid, the following new clause shall be added, namely:-
“(146) Any
income which was not chargeable to tax prior to the commencement of the
Constitution twenty-fifth Amendment) Act, 2018 (XXXVII of 2018) of any
individual domiciled or company and association of persons resident in the
Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and
Balochistan under paragraph (d) of Article 246 of the Constitution with effect
from the 1st day of June, 2018 to the 30th day of June, 2023 (both days
inclusive); and
(b) In Part IV,--
(i) clause (106)
shall be omitted;
(ii) after clause
(109), the following new clause shall be added, namely:-
“(110) The
provisions of sections in Division III of Part V of Chapter X and Chapter XII
of the Ordinance for deduction or collection of withholding tax which were not
applicable prior to commencement of the Constitution (twenty-fifth Amendment)
Act, 2018 (XXXVII of 2018) shall not apply to individual domiciled or company
and association of person resident in the Tribal Areas forming part of the
Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article
246 of the Constitution with effect from the day of June, 2018 to the 3dh day
of June, 2023 (both days inclusive).
Sd/-
(Dr.
Muhammad Iqbal)
Additional
Secretary
19. Admittedly, the JV received the letter of acceptance for
construction of Mohmand Dam on 07.03.2019 and then applied for registration
with the Federal Board of Revenue on 22.05.2019 whereas the said SRO was
issued/notified on 5th October, 2018. The perusal of the third recital as well
as clause-146 of the said SRO would clearly suggest that any income of any
individual domiciled or company and association of persons resident in the
Tribal Areas which was not subject to the incidence of chargeability and income
tax on the commencement of 25th Amendment in the Constitution through Act No.
XXXVII dated 05.06.2018 would be enjoying the same immunity from the payment of
income tax. The plain reading of this SRO would suggest that the said exemption
was applicable to those individuals domiciled in erstwhile area, company and
association of persons resident in the tribal area before the promulgation of
25th Amendment in the Constitution if were enjoying exemption from income tax,
would be applicable to them. It is well settled that in a taxing statute one
has to look at what is clearly said; there is no room for any intendment; there
is no equity about a tax, nothing is to be read and nothing is to be implied.[1]
20. Similarly, it is settled by now that where a provision in a
taxing statute can be reasonably interpreted in two ways, that interpretation
which is favourable to the assessee has to be accepted.[2] Also
if two views are possible, the one favour to the assessee has to be accepted.[3]
However, the rules regarding exemption under taxing statute have to be
established by the precedents and exemption under taxing statue must be
strictly construed. Grants of tax exemptions are given a rigid interpretation
against the assertions of the taxpayer and in favour of the taxing power. The
basis for the rule is the same as that supporting a rule of strict construction
of positive revenue laws that the burdens of taxation should be distributed
equally and fairly among the members of society.[4]
The reason for requiring a strict construction of statutes in
favour of the State where a person claims immunity from the common burden of
taxation, has been stated by Mr. Justice Brewer, as appears from the quotation
from his opinion in Stahl v. The Education Association of the Methodist
Church (54 Kan. 542, 38 Pac. 796):
“All property receives
protection from the state. Every man is secured in the enjoyments of his own,
no matter to what use he devotes it. This security and protection carry with
them the corresponding obligation to support. It is an obligation which rests
equally upon all. It may require military service in time of war, or civil
service in time of peace. It always requires pecuniary support. This is
taxation. The obligation to pay taxes is co-extensive with the protection
received An exemption from taxation is a release from this obligation. It is
the receiving of protection without contributing to the support of the
authority which protects. It is an exception to a rule, and is justified and
upheld upon the theory of peculiar benefits received by the state from the
property exempted Nevertheless, it is an exception; and they who claim under an
exception must show themselves within
its terms”.
21. Therefore, when an exempting provision is susceptible to
two interpretations, the one going against the tax payer is preferred.[5]
22. Thus, keeping in view the law laid down, as stated above,
that while interpreting a taxing statute must first be given their ordinary and
natural meaning and in case of exemption, the person claiming exemption, it
should establish that its case squarely falls under the provision of exemption.
The history of extension of tax laws to the erstwhile FATA the immunity claimed
by the residents of the area and the clear language of SRO 1213(1)/2018 dated
05.10.2018 would clearly suggest that the said exemption was/is applicable to
those individuals/domiciled in erstwhile FATA, companies and associations of
persons resident in the said area, their income prior to 25th amendment was
immune from payment of income tax could only claim the said exemption and any
company or individual not being the resident of erstwhile FATA who have
subsequently established their office in FATA after 25th Amendment in the
Constitution are not entitled to the exemption in terms of SRO 1213(1)/2018
dated 05.10.2018.
23. Even otherwise, in the present case, the reliance of the JV
is in the first amendment to the JV agreement whereas Article-VI was amended by
referring that the project will be managed through a Project Implementation
Officer (PIO) situated at Mauza Patti Banda, Tehsil Pandyali Mohmand District,
Khyber Pakhtunkhwa. Therefore, it is the claim of the JV that it has a
registered office at erstwhile FATA, therefore, it being a person situated
at/resident of erstwhile FATA is exempt from the payment of tax. However, not
only the fact that the said JV has allegedly subsequently established the said
place of business but the relevant officer of the respondent-department as
evident from the impugned order when visited the said place, he could not find
any place of business of the petitioner-JV; hence, this being purely a question
of fact cannot be decided by this Court in its limited jurisdiction once it has
been seriously disputed by the respondent-Revenue.[6]
24. Moving on further. The close perusal of Section 92 of the
Ordinance of 2001 clearly suggest that income received by the members of the
association of person constituted the income of the members of the JV and in
order to avoid the said income being taxed twice, the association of person is
required to pay the tax U/S 92 of the Ordinance of 2001. Thus, for all
practical purposes it is the income of the partners of the JV which is subject
to the incidence of taxation and both the members of JV are the resident of
settled area as one has registered office at Lahore and the other is Foreign
Company having office at Islamabad.
25. Moving on to the assertion of the learned counsel for the
petitioner that since in the contract document, the employer has undertaken
that the income of the contractor would not be subject to the incidence of
taxation. There can be no two views that a tax is levied under the authority of
Parliament/appropriate legislature and thus exemption can be granted by the
appropriate legislature or the delegated authority under the legislation. WAPDA
has no authority either to commit with the contractor or to allow the
contractor to claim exemption from the statutory taxation. Similarly, ignorance
of law is no excuse for a person that he would not be subject to the penal or
taxing laws of the State.
26. In view of the above, we have reached at the inescapable
conclusion that the petitioner has failed to make out a case for grant of
exemption. Resultantly, we find no merit in this petition which is accordingly
dismissed.
(Y.A.) Petition dismissed
[1]. Commissioner of Income Tax Khanpur vs.
Upper Doab Sugar Mills (1978 All L-128). Pakistan Textile Mill Owners
Association, Karachi and 02 others vs. Administrator of Karachi and 02 others
(PLD 1963 SC 137).
Islamabad Electric Supply Company Limited vs.
Deputy Commissioner Inland Revenue Audit-II, LTU, Islamabad (2016 PTD 2685).
[2]. CIT vs. Naga Hills Tea Co. Ltd (AIR 1973
SC 2524).
[3]. Sun Export Corporation vs. Collector of
Customs (1997) 6 SCC 564.
[4]. Sutherland on Statutory Construction
(Third Edition Vol.3).
[5]. Collector of Custom FBR and another vs.
Messrs Fitter Pakistan (Pvt) Ltd (2020 SCMR 1157).
Oxford University Press vs.
Commissioner of Income Tax, Companies Zone-I, Karachi and others (2019 SCMR
235).
Pakistan Machine Tool Factory (Pvt)
Ltd, Karachi vs. Commissioner of Sales, Central, Zone-B, Karachi (2006 SCMR
1577).
Messrs Bisvil Spinners Ltd vs.
Superintendent Central Excise and Land CustomsCircle Sheikhupura and another
(PLD 1988 SC 370).
[6]. Messrs Arshad & Company vs. Capital
Development Authority, Faisalabad through Chairman (2000 SCMR 1557).
Fida Hussain and another vs. Mst.
Saiqa and others (2011 SCMR 1990).
PAKCOM Limited and others vs.
Federation of Pakistan and others (PLD 2011 SC 44).