VS, 2008 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 442 (2008)

(a) Income Tax Ordinance (XLIX of 2001)---

----Ss.161(1)(a) & 236(1)(b)(3)---Finance Ordinance (XXVII of 2002), Preamble---Failure to pay tax collected or deducted---Pay-phone company---Assessee in default---Assessee was held in default on account of not deduction of income tax @ 10% on its sales under S.236(1)(b)(3) of the Income Tax Ordinance, 2001 on the ground that assessee was a pay phone company and liable to collect withholding tax on its sales as the pay phone companies were brought under the ambit of withholding tax regime through Finance Ordinance, 2002---Validity---Tax @ 10% was deductible by the companies dealing with pre-paid cards for telephones---Assessee was admittedly a pay-phone company and there was visible difference between the pre-paid system and payphone card system due to different nature and character with each other---Provisions of S.236(1)(b)(3) of the Income Tax Ordinance, 2001 were not attracted and assessee was exempt from withholding tax @ 10%---Smart card was not similar to a prepaid card; both these cards were not one and the same thing---Provisions of S.236(1)(b)(3) of the Income Tax Ordinance, 2001 were not applicable in the case of a pre-pay-phone company---Orders passed by both the Authorities below under S.161 of the Income Tax Ordinance, 2001 were vacated and annulled by the Appellate Tribunal.

2004 PTD 3032 and (2006) 94 Tax 2007 distinguished.

(b) Income Tax Ordinance (XLIX of 2001)---

----S.236(1)(b)(3)---Telephone users---PCO operators---Non-deduction of tax---Provisions of S.236(1)(b)(3) of the Income Tax Ordinance, 2001 were not very clear about PCO operators and it was a settled law that where there was any ambiguity in taxation laws, the benefit of same had to be given to the assessee.

Shahzad Ahmed Malik, F.C.M.A. for Appellant.

Nemo for Respondent.

ORDER

The instant appeals at the instance of the assessee have been filed against the consolidated impugned order dated 28-10-2006 recorded by the C.I.T./W.T.(A) Islamabad. As per memo. of appeal number of argumentative grounds have been taken, however, the gist of the same is that the assessee is aggrieved by confirmation of assessment order framed under section 161 of the Income Tax Ordinance, 2001, whereby the assessee-company has been declared as assessee in default on account of not deduction of income tax @ 10% on its sales under section 236(1)(b)(3).

2. The facts in brief of the case are that the assessee is a private limited company, engaged in the business of running of Public Call Offices. Return of income along with receipts and expenditure statements were filed wherein sales were declared at Rs.353,600 and Rs.2,658,000 for the tax years 2004 and 2005, respectively. During assessment proceedings it was observed that the assessee is a pay phone company and liable to collect withholding tax on its sales @ 10% in terms of section 236 (1)(b)(3) of the Income Tax Ordinance, 2001 because the pay phone companies were brought under the ambit of withholding tax regime through Finance Ordinance, 2002. Show-cause notice was issued to the assessee-company for detailed reply against which explanation tendered by the assessee was treated unsatisfactory for the factors and reasons enumerated in the body of assessment order. As a sequel to that the assessee was held in default under section 161(1)(a) and levied income tax to the tune of Rs.35,360 and Rs.265,800 for the tax years respectively. In appeal the learned C.I.T. (A) rejected the assessee's appeal for the reason that the learned AR of the assessee put forth the same arguments which were reproduced in the body of assessment order and could not dislodge the same before him. It was further held that nature of business and system operated by the assessee-company is identical with that of aforementioned petitions, relating to the liability of the petitioners with Reference to section 236(3) of the Ordinance, which have been rejected by the Sindh High Court and leave to appeal preferred against that judgment was also rejected by the apex Court of Pakistan vide reported-judgment cited as 2004 PTD 3032.

3. The learned AR of the assessee has forcefully contended that the company was not liable to deduct and deposit 10% withholding tax on the bills etc. because the company is not dealing with any type of prepaid cards as per section and its units were transferred though software i.e. NMS(Network Management System) through Comsat a Government organization. He further stated that the section 236 provides in the case of users of prepaid telephone cards and subscribers of mobile telephone, and withholding tax @10% shall be collected on the amount of bill or sales price of prepaid network .It means that the deduction shall be made from the subscriber and subscriber means the user of the actual service and not the agent of network who is merely selling the service on behalf of the service provider i.e. P.T.C.L. and P.T.C.L. always deducted tax as per section 236 of the networks as per specified rates in its regular billing. He argued that the payphone service company is acting on behalf of the service provider i.e. P.T.C.L. and sells the services of P.T.C.L. through its franchise premises. He therefore, prays for exemption of deduction the withholding tax @ 10% on the bills etc.

4. We have heard the arguments put forth by the learned AR and also examined the relevant record available on file. Since the issue under consideration pertains to section 236 (1)(b)(3) therefore, we deem it proper to reproduce the provisions of the said section as under:-

"Section 236

(1) Advance tax at the rates specified in Part-IV of the First Schedule shall be collected on the amount of

(2) prepaid cards for telephones.

(3) The person issuing or selling prepaid cards for telephones shall collect advance tax under subsection (1) from the purchasers at the time of issuance or sale of cards."

Through the reading of the above said provision, it has become crystal clear that the tax @ 10% is deductible by the companies dealing with prepaid cards for telephones but in the instant case it is an admitted fact that the assessee is payphone company. We find that there is visible different between the prepaid system and payphone card system due to difference nature and character with each other. Therefore, provisions of section 236(1)(b)(3) are not attracted and the assessee is exempt from withholding tax @ 10% specified in the said section. In the system of PCOs being operated by the company four parties are involved in entire operations, i.e. P.T.C.L. Company PCOs who obtains a system from the company and Call Maker who is the consumer. The relationship between the P.T.C.L. and assessee-company is regulated through written agreement. According to the terms and conditions of agreement certain number of payphone equipment is purchased from P.T.C.L. The company is given meaningful traffic volume based discount by the P.T.C.L. on their combined NWD and International revenue. The point of interconnection between the parties is the card operated payphone terminal approved by the PTA to be installed by and at own cost and expense of the operator i.e. the company. Keeping in view P.T.C.L.'s convenience in providing local line and wire P.T.C.L. makes necessary arrangements to provide on first priority, telephone lines to the operator for interconnection with the operator's card operated payphone terminal. The `advice note' to be issued for every new connection for the operator invariably contains the relevant category code allocated to the operator by P.T.C.L. under computerized corporate billing system. P.T.C.L. intimates to company the allotted telephone number along with the category code. The operator is given a monthly traffic volume based discount by P.T.C.L. on their combined NWD and international revenue. In respect of billing it is provided in the agreement that P.T.C.L. bill will be the final document to establish the liabilities at both ends. Billing will be done as per P.T.C.L. policy. The billing will be on minute basis instead of the unit basis for payphones. The company will ensure the compatibility/readiness of its NMS and payphones for the minute based charges except PSTN local calls at its own cost and risk. For the purpose of calculating the minutes consumed in a call, principle of upward rounding is used. Prepaid cards of different values are issued by mobiles telephone companies. These prepaid cards bear a secret code number which is covered by some chemical and becomes visible after scratching the chemical painted on it. This code number is entered in the system for activation. After such entry the system becomes operational and remains so until the price against which it was purchased is finally consumed. In the system of payphones of PCOs similar system of activation through electronic system is involved. The activation card which is also known as smart card is issued against advance payment in respect of units desired to be purchased. System remains operative until the units purchased against advance payments are consumed. When credit balance of the PCOs operator ends, the system will automatically stop and no further service will be provided to him. The entire system is electronically controlled. Furthermore, the assessee is a licenced payphone card, service provider running number of PCOs at different locations using P.T.C.L. landlines. The machines provided by the appellant-company to PCOs are operated. by electronic key, which is also known as smart card. The smart card keeps the system in working conditions till the consumption of unites purchased against advance payment of price. The electronic method of activation, operation and control of this system is similar to the system of prepaid cards. In the payphone cards of PCO operators P.T.C.L. has no direct linkage with the end users who are the call makers. The company purchases the system including equipment and network from P.T.C.L. P.T.C.L. makes collection of withholding tax from the company according to the rates applicable to landline connections. The company can claim credit of such with holding tax towards their income tax assessments because this tax is adjustable and is not final discharge of tax liability falling under presumptive tax regime. The relationship between P.T.C.L. and company is that of seller and purchaser so P.T.C.L. is legally correct and justified in withholding tax on its sales made to the company according to the prescribed rates. In the prepaid cards the number of units is restricted to the value of cards. Although in the system of payphone cards of PCO operators certain number of units are purchased against advance payment of their value but in both these type of cases neither the activation is identical nor the operation system is identical and the termination system is also not identical. The user of prepaid card is the ultimate consumer. The user of smart card is the PCO operator who provides further facility of using the telephone to the consumer or end user who is generally and unidentified person. Therefore, conditions for chargeability of withholding tax in both these cases are totally different. Nature of cards used in payphone services is quite different from the nature of prepaid telephone cards. There is no billing involved in the cases of PCOs. In case of a payphone service the company is only acting on behalf of the service provider (P.T.C.L. the principal) and sells the services of P.T.C.L. through its sets placed at the points of sale i.e. its franchises premises, neither the agent, nor its franchises can be considered as subscriber or user. The units in the cards are not considered consumed unless they are actually consumed. The units may be returned and resold. to any other franchise. Actually these units have been advanced to the franchise or place for sale at the point of sale by the company for sale to the subscriber through company's payphone sets. The units transferred to the franchise remain to be property of the company and the company has the right to cancel the rate of the units through its computer system any time before the actual is made. During the period relevant to tax years under appeal the provisions of section 236(1)(b)(3) were not very clear about PCO operators and it is a settled law that where there is any ambiguity in taxation laws, the benefit has to be given to the assessee. The case-law referred to during the proceeding has no relevance to the issue under consideration because in the case reported as 2004 PTD 3032 the apex Court gave decision about vires of section 236 of the Income Tax Ordinance 2001 whereas in the case reported as (2006) 94 Tax 2007 (HC Kar.) the Honourable Court did not adjudicate upon the issue under consideration raised through constitutional petitions holding that certain factual controversies were involved which could not be solved by the High Court without holding investigation into such disputed questions of facts.

5. In the light of above analysis we conclusively hold that smart card is not similar to a prepaid card. Both these cards are not one and the same thing. Therefore, provisions of section 236(1)(b)(3) are not applicable in the case of assessee-company. Therefore, we vacate the orders passed by both authorities below under section 161 of the Income Tax Ordinance, 2001 and accept the assessee's appeal in terms of prayer. Impugned order under section 161 is hereby annulled.

6. The assessee's appeals succeed as above.

C.M.A./5/Tax(Trib.)Appeal accepted.