COMMISSIONER INCOME TAX AND WEALTH TAX, GUJRANWALA ZONE, GUJRANWALA VS Messrs ASIF INDUSTRIES, ALIPUR CHATTA, WAZIRABAD
2005 P T D 1145
[Lahore High Court]
Before Muhammad Sair Ali and Sh. Azmat Saeed, JJ
COMMISSIONER INCOME TAX AND WEALTH TAX, GUJRANWALA ZONE, GUJRANWALA and others
Versus
Messrs ASIF INDUSTRIES, ALIPUR CHATTA, WAZIRABAD and others
I.T.As. Nos. 374, 89, 526, 359, 15, 16, 17 of 1999 and 466 of 2000, decided on /01/.
15th February, 2005. (a) Contract---
----CIF (Cost, Insurance & Freight)---Concept.
CIF (Cost, Insurance & Freight) refers to a contract, whereby the seller assumes the responsibility to make available the goods at the port of loading of the ship on which the goods are to be dispatched, make payment of all handling, transport and insurance charges up to the time the goods are loaded on to the ship, and thereafter meet the charges including insurance and freight incurred in connection with the goods till the same are unloaded at their destination. The property in the goods may pass on shipment or tender. The possession usually does not pass to the seller until documents of shipment are handed over in exchange for the price.
The two terms (CIF and FOB) pertain to two types of contract relating to sale and purchase of exported goods determining the nature and extent of the responsibilities and liabilities of the buyer and seller and the events whereupon the property in the goods is transferred from the buyer to the seller. The nature of the contract has no nexus or connection to the method of accounting for determining the income, profits or gains derived therefrom.
(b) Contract---
----FOB (Free on board)---Concept.
FOB (free on board) relates to a category of contracts whereby the seller assumes the responsibility for all charges incurred till the goods are loaded on to the ship at the port of loading, whereafter, the buyer alone is responsible for all subsequent charges such as storage on board, freight, insurance and unloading charges.
The two terms CIF and FOB pertain to two types of contract relating to sale and purchase of exported goods determining the nature and extent of the responsibilities and liabilities of the buyer and seller and the events whereupon the property in the goods is transferred from the buyer to the seller. The nature of the contract has no nexus or connection to the method of accounting for determining the income, profits or gains derived therefrom.Â
(c) Income Tax Ordinance (XXXI of 1979)---
----Ss. 32, 60, 61, 62, 63, 64 & 65---Income Tax Rules, 1982, R.216(3)(a)---Method of accounting---Computationofexportprofitsand tax attributable to export sales---CIF and FOB contracts---Provision of S. 32,IncomeTaxOrdinance, 1979 refersanddealswiththemethodofaccountingtobeemployedanddoesnotdealwiththenatureofthecontract,underwhichthebusinesshasbeencarriedout---FOB and CIF contracts have no connection to the method of accounting to be employed, therefore, S. 32 of the Ordinance has no nexus with the determining the liability of the assessee whose liabilityfor payment of income tax would be determined by Ss. 60, 61, 62, 63, 64 & 65 of the Income Tax Ordinance, 1979 and other related provisions.
Section 32 of the Income Tax Ordinance, 1979 pertains to the method of accounting to be employed for determining the income, profits and gains in various eventualities. The method of accounting is a manner in which the incomes and expenses are recorded in the books of account of any business venture. Two principal methods of accounting are employed commonly referred to as the cash system and the mercantile system. In the former, only the actual receipts and disbursements are recorded in the books of accounts while in the latter, in addition to the actual receipts, liabilities incurred are also recorded. The method of accounting primarily refers to the mode for maintaining the books of account and incorporating the entries of the business activity therein. It is only the tools or a system for keeping accounts & financial record. In the above perspective, section 32 of the Income Tax Ordinance, 1979 including subsection (3) thereof, refers and deals with the method of accounting to be employed and does not deal with the nature of the contract, under which the business has been carried out. While on the other hand, FOB and CIF contracts have no connection to the method of accounting to be employed, therefore, section 32 of the Income Tax Ordinance, 1979 has no nexus with the determining of the liability of the assessee whose liability for payment of income tax would be determined by sections 60to65oftheOrdinanceandotherrelatedprovisions.Â
(d) Income Tax Ordinance (XXXI of 1979)---
----Ss. 32 & 136---Income Tax Rules, 1982, R. 216(3)(a)---Appeal to HighCourt---Methodofaccounting---Computation ofexportprofitsand tax attributable to export sales---Questions raised to be decided by the High Court were to the effect whether on facts and circumstances of the case, the Tribunal was justifiedindirectingthatwhilecomputingthe income of assessee CIF sales be adopted and that whether the Tribunal was justified in giving the said directions to adopt CIF sales in spite of the provisions of S. 32(3), Income Tax Ordinance, 1979 and Income Tax Rules, 1982, R. 216(3) when the trading results were discarded by the Assessing Officer ---Validity---Held, question of law purported toberaiseddidnotariseinthefactsandcircumstancesofthe case requiring the expression of an opinion by the High Court.
The Commissioner of Income Tax Zone Gujranwala v. Messrs Anwar Enterprises Sialkot 1999 PTD 1329 fol.
Sardar Ahmed Jamal Sukhera for Petitioner.
ORDER
This order shall dispose of Income Tax Appeals bearing No.89/99, 526 of 1999 titled CIT Gujranwala v. Messrs Fragrance Traders, 466 of 2000 CIT Gujranwala v. G.M. Traders, 359 of 1999 CIT Gujranwala v. Messrs Walter Impex and 15, 16 and 17 of 1999 CIT Sialkot v. Messrs Citizen Sports involving almost common/identical question of law.
2.Respondent/assessee in ITA No.374 of 1999, is engaged, inter alia, in the business of export of various items, and during the course of the assessment, the declared net income derived from the export on (CIF) basis was rejected and the Assessing Officer purported to convert the CIF sales into FOB sales by deducting of insurance and freight charges andapplying the GP (gross profit) rate thereupon. Aggrieved thereby, the assessee respondent filed an appeal before theCIT(Appeals) which was accepted and the impugned order was set aside with a direction to apply the appropriate GPA rate on the sales/export declared on CIF basis. The department challenged the order of the CIT before the ITAT by way ofappeal, which was dismissed by means of order under these further appeals.
3.It is contended on behalf of the appellant that the following questions of law arise from the order of the ITAT namely:--
Whether on facts and circumstances of the case, the learned ITAT was justified in directing that while computing the income of the assessee CIF sales be adopted ,
Whether the learned ITAT was justified in giving the above directions to adopt CIF sales in spite of provision of subsection 3 of section 32 of the Ordinance and Rule 216 (3)(a) when the trading results are discarded by the Assessing Officer.
4.The contentions raised by the learned counsel for the appellant in brief are that section 32 of the ITO 1979 and rule216 of the IT Rules, 1982 enjoined the assessing authority to compute the tax liability on FOB basis and not on CIF basis. And by deduction of the cost of insurance and freight, CIF price stands converted into FOB as has been rightly done by the assessing authority.
5.Term CIF and FOB are the abbreviation of two categories of contracts of international trade, which have been in vogue for a considerable period of time and their meaning and scope are now well settled. CIF (Cost, Insurance & Freight) refers to a contract, whereby the seller assumes the responsibility to make available the goods at the port of loading of the ship on which the goods are to be dispatched, make payment of all handling, transport and insurance charges up to the time the goods are loaded on to the ship, and thereafter meet the charges including insurance & freight incurred in connection with the goods till the same are unloaded at their destination. The property in the goods may pass on shipment or tender. The possession usually does not pass to the seller until documents of shipment are handed over in exchange for the price.
6.On the other hand, FOB (free onboard)relatestoacategoryofcontractswherebythesellerassumestheresponsibilityforallcharges incurred till the goods are loaded on to the ship at the port of loading, whereafter, the buyer alone is responsible for all subsequent charges such as storage on board, freight, insurance and unloading charges.
7.The two terms (CIF and FOB) pertain to two types of contract relating to sale and purchase of exported goods determining the nature and extent of the responsibilities and liabilities of the buyer and seller and the events whereupon the property in the goods is transferred from the buyer to the seller. The nature of the contract has no nexus or connection to the method of accounting for determining the income, profits or gains derived therefrom.
8.The Section 32 of the I.T.O., 1979 pertains to the method of accounting to be employed for determining the income, profits and gains in various eventualities. The method of accounting is a manner in which the incomes and expenses are recorded in the books of account of any business venture. Two principal methods of accounting are employed commonly referred to as the cash system and the mercantile system. In the former, only the actual receipts and disbursements are recorded in the books of accounts while in the latter, in addition to the actual receipts, liabilities incurred are also recorded. The method of accounting primarily refers to the mode for maintaining the books of account and incorporating the entries of the business activity therein. It is only the tools or a system for keeping accounts & financial record. In the above perspective, section 32 of the I.T.O. including subsection 3 thereof, refers and deals with the method of accounting to be employed and does not deal with the nature of the contract, under which the business has been carried out. While on the other hand, FOB and CIF contracts have no connection to the method of accounting to be employed, therefore, section 32 of the I.T.O. has no nexus with the determining of the liability of the assessee whose liability for payment of income tax would be determined by sections 60 to 65 of the Ordinance and other related provisions.
9.In the above circumstances, the questions of law purported to be raised do not arise in the facts and circumstances of the case requiring the expression of an opinion by this Court. We are fortified in this view by the judgment of this Court reported as 1999 PTD 1329 (The Commissioner of Income Tax Zone Gujranwala v. Messrs Anwar Enterprises Sialkot) whereinsimilarquestionsoflawwereattemptedto be raised in the context of CIF sales and were examined in juxta position of section 32 of the Ordinance. In the aforesaid case, the Court came to the conclusionthatnoquestionsoflawinthesimilarfactsandcircumstancesarosefromtheassessmentortheorderoftheITAT.
10.Adverting to the connected appeals, referred to herein above, suffice it to add that in all these cases the appellate-department in fact attempted to raise almost identical or legally similar questions of law with reference to CIF Sales as also section 32 of the Ordinance, and after careful consideration of the facts and circumstances emerging therefrom, we hardly find any question of law capable of being answered by this Court and consequently, for the reasons enumerated ibid, I.T.As. Nos.89/99, 526/99, 359/99, 466/2000, 15,16 and 17 of 1999 are also dismissed along with the present Appeal No.374/99 and the C.Ms. in these appeals.
M.B.A./C-47/LOrder accordingly