(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 52, Expln.‑‑‑Finance Act (IV of 1999)‑‑‑Application of explanation‑‑‑Explanation was fully applicable retrospectively to all assessments pertaining to prior years, whether pending or finalized on 1‑7‑1999.

2000 PTD (Trib.) 466; I.T.As. Nos.5931/LB to 5936/LB of 1996; I.T.As. Nos. 4659/LB to 4660/LB of 1999 and 1997 PTD (Trib.) 879 rel.

I.T.A. No.882/LB of 2000 distinguished.

2001 PTD (Trib.) 1040 per incuriam.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑--

‑‑‑‑S. 50(4) & 52‑‑‑S.R.O. 368(I)/94, dated 7‑3‑1994‑‑‑S.R.O. 828(I)/91, dated 24‑8‑1991‑‑‑Non‑deduction of tax from payments made for manufacturing of exported cloth‑‑‑Validity‑‑‑In case of "self manufactured exports", all supplies of materials utilized in manufacture of finished product for export were exempt from tax deduction under S.50(4) of 'the Income Tax Ordinance, 19'79‑‑‑Assessee was not a self manufacturer of cloth that it had exported‑‑‑Cloth had been manufactured by third parties‑‑‑Exemption from tax deduction under S.50(4) of the Income. Tax Ordinance, 1979 from payments made to third party manufacturers of cloth, was not available to the assessee.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 50(4)‑‑‑Deduction of tax at source‑‑‑Assessing Officer had to scrutinize each and every payment to determine as to which of these payments involved tax withholding. under S.50(4) of the Income Tax Ordinance, 1979 rather than to hold the assessee liable to tax withholding in respect of total payment‑‑‑Validity‑‑‑Assessee must lead necessary evidence and in absence of specific evidence made available by the assessee/payer, the Assessing Officer of payer was justified in treating the aggregate payments made as subject to tax withholding under S.50(4) of the Income Tax Ordinance, 1979 as these payments had been made by the assessee on account of cloth manufactured by third party for the assessee.

(d) Income Tax Ordinance (XXXI of 1979)‑‑‑

----Ss. 52&50(4) ---- S.R.O. 368(I)/94, dated 7-3-1994---- S.R.O. 828(I)/91, dated 24-8-1991--- Liability of persons failing to deduct or pay tax---Exported cloth was got manufactured from third party---No deduction under S.50(4) of the Income Tax Ordinance, 1979 was made at the time of making payment to such third party on the ground that it being an export was exempted from the provision of S.50(4) of the Income Tax Ordinance, 1979‑‑‑Department treated the assessee as "assessee in default" under S.52 of the Income Tax Ordinance, 1979 as the payments made for manufacturing of cloth were for "services rendered"‑‑‑Validity‑‑‑Manufacturing of cloth' by third party utilizing yarn supplied by the assessee was in the nature of "services rendered"‑‑ Weaving units weave cloth strictly as per specifications given to them by the assessee and did not manufacture/sell finished cloth on their own account‑‑‑Such work done was in the nature of "services rendered" and was distinguishable from dying and calendering work that entail value addition to `cloth' and the finished production (cloth), though increased in value at the end of the dying/calendering process, remains identifiable as `cloth'‑‑‑Where cotton yarn or synthetic yarn was "converted "into cloth by a weaving unit, it changes into a new product and this was not a case "value addition" to cloth and this transformation was only possible because of the services rendered by the weaving unit, "converting" the yarn into cloth in view of such specialized "services rendered" by the third party weaving units, the payments made to them by the assessee were subject to tax withholding under S.50(4) of the Income Tax Ordinance, 1979‑‑‑Such payments made were not akin to "value addition" payments made on account of dying/calendering/finishing of cloth‑‑‑Provision of S.52 of the Income Tax Ordinance, 1979 had been rightly invoked in circumstances.

(e) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 86 & 50(4)‑‑‑Charge of additional tax for failure to deduct and pay tax‑‑‑Deductions were not made‑‑‑Charge of additional tax‑‑ Validity‑‑‑Additional tax‑ charged under S.86 of the Income Tax Ordinance, 1979 was essentially consequential to delayed deposit of tax that was required to have been deducted under S.50(4) of the Income Tax Ordinance, 1979 and charge of additional tax was mandatory in cases where default was established and thus there was no escape of such levy.

Hamid Masood, F.C.A. for Appellant.

Anwar Ali Shah, D.R. for Respondent.

Date of hearing: 11th March, 2003.

ORDER

MUHAMMAD MUNIR QURESHI (ACCOUNTANT MEMBER).‑‑‑These appeals by a private limited company arise out of order passed by the CIT(A), Zone‑1; Faisalabad, dated 16‑11‑1999.

2. Briefly stated, the relevant facts here are that the assessee company has exported cloth that it got manufactured from third party and it has not made any tax deduction under section 50(4) at the time of making payment to such third party on the ground that it being an exporter is exempt from the provisions of subsection (4) of section 50 of the (since repealed) Income Tax Ordinance, 1979. The Department has held that the assessee is in default of the provisions of section 50(4) and has accordingly treated the appellant as "assessee in default" as per provisions of section 52 of the Ordinance.

3. It is the appellant's contention that the First Appellate Authority has unjustifiably maintained the two orders passed under section 52 of 1986 by the DCIT of the payer/purchaser (i.e. the appellant company) in the assessment years 1998‑99. and 1999‑2000 when the applicable law statedly empowered the DCIT of the recipient/seller with exclusive jurisdiction in this regard and in this context the appellant has referred to Tribunals judgments cited as 2001 PTD (Trib.) 755 and unreported judgment cited as I.T.A. No.882/LB of 2000 (AY 1997‑98), dated 22‑12‑2001. It is also the appellants contention that being an exporter, the appellant company is exempt from the provisions of subsection (4) of section 50. Further, it is argued that the DCIT has wrongly held that payments made by the assessee‑company to the‑third party manufacturers of cloth are for "service rendered."' Finally it is the appellant's contention that the Assessing Officer was required to scrutinize each and every payment to third party for cloth manufacture at appellant's behest and then to determine which of these payments involved tax withholding under section 50(4) rather than hold the appellant liable to tax withholding in respect of the total payment to third party on account of cloth supplied to the assessee‑company by them.

4. It is the departmental contention that pursuant to amendment made in section 52 through Finance Act, 1999, the DCIT of the payer/purchaser is competent to treat the payer as "assessee in default" where such person is found to be in default of the provisions of subsection (4) of section 50. Furthermore, the exemption available to exporters statedly only in the case of supplies made to the exporters in respect of goods meant for export such as raw material inputs. In the case of the assessee company nothing has been supplied to the assessee company by way of raw material input as regards the cloth exported. Rather, manufactured cloth has been got made by the appellant company from third party, as per specifications given to them by the assessee, and the same has then been exported by the appellant and in this context it is argued that the provisions of section 50(4) are fully applicable as the manufacture of cloth by third party for the assessee, utilizing the yarn supplied to them by the assessee, is in the nature of `services rendered .

5. We have heard both sides and have examined the available recorded and our findings are recorded as under:‑‑

(1) As regards the appellant's plea that the orders passed under section 52 are without jurisdiction and hence void ab initio, in our considered judgment the import of the amendments in section 52 brought about through the Finance Act. 1999 stand well clarified through various judgments of the ITAT. The first judgment in this regard is ITAT order in ITA No's 5931‑6/LB/1996 (AY 1992‑93 & 1993‑94), dated 17‑8‑1999 in which, making specific reference to the Explanation to section 52, the Tribunal has held that only the DCIT of the payer/purchaser was competent to pass order under section 52 and not the DCIT entrusted with monitoring compliance with withholding tax provisions. In this case, assessee's assessments for 1992‑93 and 1993‑94 stood completed well before 1‑7‑1999 but were cancelled by the ITAT (on appeals filed by the assessee against the order of the DCIT under section 52 confirmed by the CIT(A)) consequent to change in law pursuant to insertion of Expl to section 52 through the Finance Act, 1999, as the orders had been passed by, an authority other than the DCIT of the payer purchaser. The judgment of the Tribunal leaves no doubt that the Expl. was fully applicable retrospectively as well as retroactively, to all assessments pertaining to prior years, whether pending or finalized on 1‑7‑1999.

(2)In another judgment of the ITAT cited as 2000 PTD (Trib.) 466 it has been held unequivocally that the amendments in section 52 are applicable retrospectively and that the amendments are declaratory and procedural in nature.

(3)In yet another judgment, ITA Nos.4659‑60/LB/99 (AY 96‑97 and 97‑98), dated 6‑6‑2002 the ITAT has ruled that the change in section 52 brought about through Finance Act, 1999 was both retrospective as well as retroactive and it had rendered the well known Tapal Energy judgment of the Sindh High Court to be of no effect.

(4)In the light of the three judgments cited supra, (that are binding on this Bench (1997) 75 Tax 108 (Trib.) the judgment cited by appellant as (2001) 83 Tax 51 (Trib.) is clearly `per incurium' and hence of no legal effect as the law has been patently misinterpreted and a special interpretation of the import of procedural amendments to section 52 through the Finance Act, 1999 has been made that conflicts squarely with well accepted norms pertaining to the interpretation of fiscal statutes. As held in (2000) 81 Tax 21 (Trib.), the Explanation to section 52 enacted on 1‑7‑1999 is both procedural and declaratory and hence fully applicable to all years prior to 1‑7‑1999. As for the other judgment cited by the appellant, (I.T.A. No.882/LB of 2000 (Assessment Year 199798), dated 22‑11‑2001), the said judgment envisages a situation in which the recipient has already discharged his liability under section 50(4) and resultantly it has been held that no further tax can be recovered from the payer under section 52. In the case presently before us, it is .not the appellant's contention that the recipients (i.e. the third party who have manufactured the cloth for the appellant) have discharged their liability under section 50(4) and hence this judgment is of no avail to the appellant.

(5)In the case of "self‑manufactured exports", all supplies of materials utilized in the manufacture of the finished product for export are indeed exempt from tax deduction under section 50(4). Admittedly, the appellant‑company is not a self manufacturer of the cloth that it has exported. Rather, the cloth has been manufactured by third party for the appellant prima facie, therefore, the appellant's case is not covered by S.R.O. 368(I)/94, dated March 7, 1994 (sub‑para (iii) thereof); issued in B exercise of the powers conferred by clause (ii) of the proviso to subsection (4) of section 50 of the Income Tax Ordinance, 1979, in supersession of S.R.O. 828(I)/91, dated 24th Aug, 1991: That being so, exemption from tax deduction under section 50(4) in the case of payments made by the assessee‑company to the third party manufacturers of cloth, is not available to appellant in the assessment years under appeal.

(6)As regards the individual transactions/payments made by the assessee‑company/the payer to the third party manufacturers of cloth, in our judgment the appellant must lead necessary evidence in this regard and in the absence of specific evidence made available by the assessee/payer, the Assessing Officer/DCIT of payer is justified in treating the aggregate payments made as subject to tax withholding under section 50(4) as these payments have been made by the assessee‑company on account of goods supplied viz cloth manufactured by third party for the assessee, and this would also appear to be in line with Hon'ble Supreme Court of Pakistan judgment cited as (2002 PTD 1) paragraph (7) thereof.

(7)No Exemption Certificate has been issued by the Competent Authority to the assessee permitting non‑deduction of withholding tax under section 50(4).

(8)The manufacture of cloth by third party weaving units utilizing yarn supplied by the assessee company is in the nature of "services rendered". These weaving units weave cloth strictly as per specifications given to them by the‑assessee‑company and do not manufacture/sell, finish cloth on their own account. Such work done is in the nature of "services. rendered" and is distinguishable from dying and calendering work that entail value addition to `cloth' and the finished product (cloth), though increased in value at the end of the dying/calendering process, remains identifiable as `cloth'. However where "cotton yarn" or synthetic yarn is "converted" into cloth by a weaving unit, it changes into a new product and this is not therefore, case of "value addition" to cloth and this transformation is only possible because of the services rendered by the weaving unit, "converting" the yarn into cloth. In view of such specialized "services rendered" by the third party weaving units the payments made to them by the assessee‑company are subject to tax withholding under section 50(4). Such payments made are not akin to `value addition" payments made on account of dying/calendering/finishing of cloth and do not fall in any of the categories listed in paragraph (6) or C.B.R. Circular No.7 of. 1992 (Income Tax) dated 18th March. 1992.

(9)For the reasons recorded supra, we hold that the provisions of section 52 have been rightly invoked in the instant case in the assessment year 1998‑99 and 1999‑2000. As for addl tax charged under section 86 the same is essentially consequential to delayed deposit of tax that was required to have been deducted under section 50(4) and the charge of addl. tax being mandatory in cases where default is established as. in the case or the present assessee, there is ao escape from the levy. Hence) maintained.

Resultantly, the appeals are rejected.

C.M.A./802/Tax (Trib.)Appeals rejected.