COMMISSIONER OF INCOME TAX VS PAK ARAB FERTILIZER (PVT.) LTD. MULTAN, 2009 PTD-LAHORE-HIGH-COURT-LAHORE 157 (2008)

Income Tax Ordinance (XXXI of 1979)---

----Ss.65, 62, 80-C & 80-D---Reopening of case---Definite Information---Additional assessment---Additional assessment was formulated and the claim of the assessee, having relationship of "seller and purchaser" between the two companies (one manufacturing and the other marketing company) was rejected---Revenue had reopened the case of the assessee (manufacturing company) for the reasons that Ministry of Production had made a representation to the Central Board of Revenue for exemption of the marketing company from levy of turn-over tax under S.80-D, Income Tax Ordinance, 1979 on the grounds that marketing company had obtained exemption from levy of tax under S.80-D of the Income Tax Ordinance, 1979 on the point that it was not selling any product on profit and that marketing company was operating on "no profit no loss basis" making the sales on behalf of its associated companies which were engaged in the manufacturing; that Central Board of Revenue granted exemption to the marketing company from charging minimum tax under S.80-D on its turn-over that department considering this to be "definite information" to invoke S.65 of the Ordinance held that relationship of manufacturing company and marketing company was not a "seller and purchaser" but of a "principal and agent" and thus show cause notice was issued under S.62 of the Ordinance and assessment order was passed accordingly---Assessment under Ss.62/65, Income Tax Ordinance, 1979 was set aside in appeal and the appeal before the Appellate Tribunal also met the fate of dismissal---Validity---Held, Income Tax Appellate Tribunal had rightly found that provisions of S.80-C of the Income Tax Ordinance, 1979 were attracted to the facts of the present case and the reopening of the assessment for completion of additional assessment under Ss.62/65, Income Tax Ordinance, 1979 was not legally justified---Principles.

Central Insurance Company v. Central Board of Revenue 1993 PTD 766 SC; Messrs Pak-Saudi Fertilizer Limited v. Commissioner of Income Tax and others 2005 PTD 1607 and Ahmad Khan v. Rasul Shah and other PLD 1975 SC 311 ref.

Syed Khalid Javed Bukhari for Appellant.

Nemo for Respondent.

Date of hearing: 15th April, 2008.

JUDGMENT

SYED HAMID ALI SHAH, J.---This single judgment shall deal with and decide T.R. Nos. 3, 4, 6, 7, 8 of 2008, having common questions for decision by this Court.

2. The assessee Messrs Pak. Arab Fertilizer (Pvt.) Limited, Multan, has been selling its products, through sale agreements, executed inter se the assessee and National Fertilizer Marketing Limited (NFML). National Fertilizer Corporation Limited is the holding company, owns and controls NFML. The statements, filed by the assessee company under section 143(b) of the Income Tax Ordinance, 1979, for the tax year under reference, were accepted by the department. The petitioner/revenue reopened the case of the respondent for the years, 1993-94, 1995-96 and 1997-98, for the following reasons:--

(a) "That NFML had obtained exemption from levy of tax under section 80-D on the profit on the point that it was not selling any product on profit.

(b) The agreement between Pakarab and National Fertilizer Marketing is not that of seller and buyer but that of principal and agent.

(c) That appellant does not earn any profit on its product from buyer but pays commission in shape of expenses.

(d) The appellant's agreement was valued at par with the one which was executed between Pak Saudi and NFML-, whereas the said agreement was different."

3. Additional assessment was formulated under sections 62/65 of the Income Tax Ordinance and the claim of the assessee, having relationship of seller and purchaser, between the two companies, was rejected. Petitioner/revenue found from a representation, which Ministry of Production made to Central Board of Revenue for exemption from levy of turn over tax under section 80-D of the Income Tax Ordinance, 1979, that NFML, was operating on "no profit no loss basis" making the sales on behalf of it's associated companies, engaged in the production of fertilizer. C.B.R. granted exemption to NFML from charging minimum tax, under section 80-D on it's turn over. Department considered it definite information, to invoke the provisions of section 65 of the Income Tax Ordinance, 1979, by holding that relationship of Pak Arab Fertilizer and NFML, was not of a seller and purchaser, but of a principal and agent. A show-cause notice under section 62 of the Income Tax Ordinance, 1979 was issued which was replied by the respondent but the Assessing Officer passed the assessment order on 30-6-2000. The assessment under sections 62/65 was set aside in appeal and the further appeal before learned Tribunal, met the fate of dismissal, through order dated 27-12-2004. The department, in these tax references, have formulated the following questions of law, statedly arising out of the order of ITAT for our consideration:--

(I). "Whether in the facts and in the circumstances of the case, the learned ITAT has correctly applied legal principles of interpretation to the agreement relied upon by Pak Arab Fertilizer (Pvt.) Limited (hereinafter called as PAFL) for the purpose of determining the status of National Fertilizer. Marketing Limited (hereinafter called as NFML) vis-a-vis Pak Arab Fertilizer (Pvt.) Ltd.?

(II) Whether in the -facts and in the circumstances of the case the learned ITAT while passing impugned judgment, was cognizant of the fact that the relationship in the present case between PAFL & NFML was governed under Sale of Goods Act, 1930, with particular reference to section 19 of the said Act?

(III) Whether in the facts and circumstances of the case the ITAT has not misconstrued the ambit, nature and scope of section 50(4) of the Income Tax Ordinance, 1979, in the present case (while holding that it does not speak of purchase and sale, rather it is the relationship of recipient and payer covered thereunder), not realizing that the bare perusal of the said section leads to irresistible conclusion that the terms supply of goods, contract of services and contracts with Government Local Authority, etc, read with Explanation, particular with the principle of ejusdem generis, it is in fact the relationship of seller and buyer and not merely that of recipient and payer which forms the subject matter of the said section?

(IV) Whether under the law, PAFL or NFML were not estopped from changing their stance in the present case in the presence of the position taken by Ministry of Production for non-application of section 80-D of the Income Tax Ordinance, 1979?

(V) Was it not a statement of fact in the context of giving verdict on applicability of section 80-D the C.B.R. was the only competent authority to pass order thereon?

(VI) Whether in the facts and circumstances of the case the doctrine of lifting of the veil was not squarely applicable to ascertain and determine the true status of NMFL - in the context of determination of their true inter-relationship?

(VII) Whether in the facts and circumstances of the case the order under reference liable to be treated as being self-contradictory and suffering from surmises and conjectures a valid and judicious order in the eye of the law?

(VIII) Whether it was not fit case for reference to the Honourable High Court since there is no authoritative judicial pronouncement available at present governing the controversy forming subject matter of the present case?

(IX) Whether in the facts and circumstances of the case, ITAT was justified to hold that National Fertilizer Marketing Ltd. (NMFL), was not the intermediary Mercantile Agent of Pak Arab Fertilizer (Pvt.) Ltd. for sale of its product?

(X) Whether in the facts and circumstances of the case, ITAT was justified to ignore the superficiality of changes made in agreement in chronological sequence, year after year, between two associated "Producing" and "Marketing" Companies of NFC without any change in the nature of transaction simply to evade tax?

(XI) Whether in the facts and circumstances of the case, ITAT was justified-to deny that C.B.R. was the only competent authority to pass a categorical judgment on the applicability of section 80-D of the Income Tax Ordinance, 1979 to NFML and reference to Supreme Court's decision reported as 1996-97 PTD 766 (SC) in the case of Central Insurance Company v. Central Board of Revenue was not relevant and out of context?

(XII) Whether in the fact and circumstances of the case, the learned ITAT was justified to hold that provisions of section 80C of the Income Tax Ordinance, 1979 are attracted to the facts of the present case?"

4. Learned counsel for the petitioner has contended that learned Tribunal was persuaded to pass the order, on the basis of office memorandum No.15/23/92-NFC dated 25-8-1992, which was a letter of clarification, but learned Tribunal considered the same as exemption. The mistake was apparent on the face of record, but a judicial notice was not taken. It is further submitted that learned Tribunal treated all the entities, owned and controlled by National Fertilizer Corporation, as distinct and independent entities, without ascertaining the relationship inter se these entities. The corporate veil was required, under law, to be lifted, but the same was left without discovery of the true facts. Learned counsel has emphasized that ITAT has involved itself into interpretation of the agreement between the assessee and NFML, according to the provisions of the Contract Act, 1872, while the real transaction inter se the parties has to be adjudged under the provisions of section 19 of the Sale of Goods Act, 1930. It was vehemently argued that case of "Central Insurance Company v. Central Board of Revenue" (1993 PTD 766 (SC) was not followed by learned Tribunal.

5. Heard learned counsel for the petitioner and record perused.

6. The moot question, involved in the instant controversy, is the relationship of the assessee Messrs Pak Arab Fertilizer (Pvt.) Ltd. and NFML. It is not disputed that option as required under clause (9) of the Part IV of the Second Schedule to the repealed Ordinance, 1979, was exercised by the assessee. The department, on the basis of a representation of Ministry of Production (moved for seeking exemption from levy of turn over tax under section 80-D of the Income Tax Ordinance, 1979), claims that relationship between the two companies is of the principal and the agent. The identical view of the department came-up for consideration before a Division Bench of Sindh High Court in the case of "Messrs Pak-Saudi Fertilizer Limited v. Commissioner of Income Tax and others" (2005 PTD 1607). It was observed by the Division Bench that agent is employed by the principal, to act for and on behalf of the latter, under section 182 of the Contract Act, 1872, but such element is missing from the agreement between the production company and NFML. It was also observed that within the contemplation of sections 211 and 213 of the Contract Act, it is the obligation of the agent to account for sale, on profit and loss, which element too is missing. It was further observed that under sections 222 and 223 of the Contract Act, the agent acting in good faith, is indemnified by the principal against the consequences of that act, but the agreement between the production company and the marketing company, it is the marketing company which had indemnified, the assessee/production company against all the claims. After observing so, it was found that no relationship of agent and principal exists between the two companies. This finding was given by learned Bench, after explaining various terms of the agreement and after having glanced through plethora of case law. The agreement between Pak Arab Fertilizer (Pvt.) Ltd and NFML is similar and contains identical clauses, therefore, we do not want to dilate upon these questions once again. We, on the basis of the ratio of the judgment rendered in the case of Messrs Pak Saudi Fertilizer Ltd. (supra), hold that relationship inter se the respondent and NFML is of the seller and the buyer. The relationship of principal and agent, as alleged by the petitioner (revenue), does not exist. Our answer to questions Nos.1 and 2 is, therefore, in affirmative.

7. The representation by the Ministry of Production, for the issuance of exemption, is claimed to be an admission on the part of Ministry of Production and also of the assessee about that relationship between PAFL and NFML is of principal and agent. The relationship inter se the assessee and the marketing company is wholly based on agreements, which were signed and executed between the parties year after year. The intention of the parties can be gathered by interpreting the document as a whole. Various clauses of the agreement were reproduced and discussed by the Tribunal (Referee Member). The agreement, containing similar clauses in the case of Pak Saudi Fertilizer (supra), was examined by the Court and after referring to the various clauses, it was found by the Tribunal that agreement is an outright sale and purchase agreement and essential elements of a contract of an agency are missing. The relationship between the two companies cannot be ascertained, on the basis of admission, statedly made in the representation for exemption by the Ministry of Production. An admission can only be conclusive and binding, when it is made with regard to the true facts. Reference to the case of "Ahmad Khan v. Rasul Shah and others (PLD 1975 SC 311) will be useful and relevant part is produced hereunder:

" ..I find it difficult to subscribe the proposition that this admission is conclusive or it would otherwise destroy the title in the land according to the plaintiffs-respondents on the basis of their adverse possession for the statutory period. As ruled by their `Lordships of the Judicial Committee in Daulat Singh Ji v. Khachar Mansoor admissions of facts are only relevant, and are not conclusive and therefore, may be shown to be wrong. Their Lordships observed in the case that:--

"Evidence Act expressly provides that admission are not conclusive proof of the matters admitted. Even if it amounts to clear admissions, it will not bar a suit."

Therefore, an admission which is wrong in point of fact or is made in ignorance of legal right, has no binding effect on the person making it. This is however, subject to two well recog nized exceptions. First; such admissions become conclusive and are binding on a party making them only if it amounts to a representation on a matter of fact made, to the other party, who in consequence of such representation has altered its position."

8. Viewing the case of assessee from the above angle, there can be no other view except that admission qua the relationship between the respondent and NFML, by the Ministry of Production, is not conclusive and binding.

9. It may be pointed out that the question No. XII, referred above, is quite identical to the question No. (ii) in the case of Messrs Pak Saudi Fertilizer Limited (supra).

The question is reproduced hereunder for ready reference:

"(ii) Whether on the facts and in the circumstances of the case, the Honourable Income Tax Appellate Tribunal was, justified in holding that the case of the Appellant did not fall within the ambit of section 80C and the Respondent No.2 was justified in finalizing the assessment under normal law.?"

The Honourable Division Bench dealt with issue in paragraphs 22 and 23 of the said judgment which are reproduced here as under:--

"(22) For all the foregoing reasons, we are of the opinion that the agreement between the two companies envisages the outright sale of the fertilizers manufactured by the Appellant Company to the Marketing Company. Consequently, the advance Income Tax deducted under section 50(4) of the Ordinance upon the payments made by the latter to the former qualify to be treated as the income of the Appellant Company under sectiort 80C of the Ordinance for the year in question.

(23) In view of the foregoing discussion, we would set aside the impugned order passed by the learned Tribunal as well as the orders passed by the lower forums throughout. This Appeal is allowed. The assessment of the Appellant Company shall be finalized for the year in question under section 80C of the Income Tax Ordinance. Accordingly, Questions Nos.(ii), (vi) and (vii) are answered in the negative. As question No.(i) was never argued before us and indeed does not arise from the impugned order it need not be answered. Appeal stands disposed of."

10. For the foregoing our answer to the said question No. XII is in the affirmative and we observe that learned Income Tax Appellate Tribunal has rightly held that provisions of section 80-C of the repealed Income Tax Ordinance, 1979, are attracted to the facts of the present case and the reopening of the assessments for completion of additional assessments under sections 62/65 of the repealed Income Tax Ordinance, 1979, was not legally justified.

11. Question Nos. III to XI, in view of our answer to question Nos. I, II and XII, require no answer as discussion regarding these questions or determination thereof is only academic.

12. For what has been discussed above, we are disposing these reference applications in the manner as discussed above.

M.B.A./C-24/LOrder accordingl