IHSAN YOUSAF TEXTILES (PVT.) LTD. VS COMMISSIONER OF INCOME TAX, 2015 PTD-LAHORE-HIGH-COURT-LAHORE 812 (2014)

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

----Ss. 50(4), 52 & 133---S.R.O. No.368(I)/94 dated 7-5-1994---Reference to High Court---Payment of tax before assessment---Deduction of tax at source---Taxable supplies---Exemption from deduction of tax at source provided in S.R.O. No.368(I)/94 dated 7-5-1994---Payments made on account of supply of goods which were purchased in respect of goods exported outside Pakistan---Scope---Taxpayer was an exporter of cloth and did not deduct advance tax under S. 50(4) of the Income Tax Ordinance, 1979 at the time of making payment to third party suppliers from whom taxpayer procured yarn; and was held in default of tax under S. 52 of the Income Tax Ordinance, 1979 by the Department---Contention of taxpayer was inter alia that the taxpayer was exempted from provisions of S. 50(4) of the Income Tax Ordinance, 1979 in view of exemption provided in S.R.O. No.368(I)/94 dated 7-5-1994----Validity---Held, S.R.O. No.368(I)/94 dated 7-5-1994 related to a person making payments against "supply of goods" but it did not exempt a person from applicability of S. 50(4) of the Income Tax Ordinance, 1979 who was making payment to a third party against service rendered or in execution of a contract---Terms "payments against supply of good" and "payment against service rendered" and "execution of contract" were three distinct and independent transactions---Taxpayer, in the present case, was not a manufacturing unit of cloth; nor was the taxpayer claiming that it purchased cloth directly form the market---Contention of the taxpayer was that he was exempted under the said S.R.O. from deduction of advance tax from payments made to weavers against manufacturing of cloth supplied by the taxpayer; and said contention was misconceived as plain reading of S.R.O. No.368(I)/94 dated 7-5-1994 showed that merely being an exporter would not ipso facto bring the taxpayer within the ambit of S.R.O. No.368(I)/94 dated 7-5-1994---Said exemption was only available to exporters who were making payment on account of supply of such goods that were purchased in respect of goods exported and any payment made against service rendered or in execution of contract, whether it brought value addition to the goods or not, would not exclude such payment from within purview of S. 50(4) of the Income Tax Ordinance, 1979---No illegality therefore existed in the impugned orders---Reference was answered, accordingly.

Government of Pakistan and others v. Messrs Hashwani Hotel Ltd. PLD 1990 SC 68; Messrs Mehran Associates Ltd. v. The Commissioner of Income Tax, Karachi 1993 SCMR 274 and Messrs Army Welfare Sugar Mills Ltd. and others v. Federation of Pakistan and others 1992 SCMR 1652 rel.

(b) Interpretation of statutes---

----Taxing statute---One had to look merely at what was clearly said and there was no room for any intendment or presumption as to a tax.

Government of Pakistan and others v. Messrs Hashwani Hotel Ltd. PLD 1990 SC 68 and Messrs Mehran Associates Ltd. v. The Commissioner of Income Tax, Karachi 1993 SCMR 274 rel.

(c) Taxation---

----Exemption---Exemption from payment of tax---Statutory construction of exempting statutes and SROs---Scope-----All exemptions from taxation, including SROs, increased burden on other members of the community; and the same should be deprecated, except to the extent permissible by the express language of the statute itself---All exemptions from taxation must be given a rigid interpretation against the assertion of the taxpayer and in favour of the taxing power.

Messrs Army Welfare Sugar Mills Ltd. and others v. Federation of Pakistan and others 1992 SCMR 1652 rel.

Shahbaz Butt and M. Shakeel for Petitioner.

Khadim Hussain Zahid for Respondent.

Date of hearing: 13th November, 2014.

JUDGMENT

ABID AZIZ SHEIKH, J.---Through this single judgment, We propose to decide Income Tax Reference Applications No.408/2003 and 409/2003, as common questions of law and facts are involved in both these reference applications which are filed by one and the same company (petitioner).

2.Through these reference applications the petitioner/assessee has assailed the orders of Income Tax Appellate Tribunal, Lahore Bench, Lahore (Tribunal) dated 31-3-2003 passed in I.T.A. No.878-LB/2000 relating to assessment year 1998-1999 and I.T.A. No.879-LB/2000 relating to assessment year 1999-2000, respectively.

3.At the very outset learned counsel for the petitioner submits that he will press only following question of law which is common in both reference applications:--

"Whether on the facts and in the circumstances of the case, the Tribunal has erred in holding that weaving of cloth does not bring value addition to the cloth and the payments made on such account are not akin to value addition goods processed through dying and calendaring?"

4.Brief facts are that petitioner exported cloth that it got manufactured from third party but it did not make any tax deduction under Section 50(4) of the Income Tax Ordinance, 1979 (Ordinance, 1979), at the time of making payment to such third party on the ground that petitioner being an exporter was exempted from the provision of section 50(4) of Ordinance, 1979. The department held that petitioner was in default of the provisions of section 50(4) of Ordinance, 1979 and accordingly treated the petitioner as assessee in default as per provisions of section 52 of Ordinance, 1979. The petitioner being aggrieved filed appeals before the Commissioner of Income Tax (Appeal) CIT(A) which were dismissed on 16-11-1999 against which order, the appeals before the learned Tribunal were also dismissed vide two separate orders of even date i.e. 31-3-2003, hence these reference applications.

5.Learned counsel for the petitioner argued that learned Tribunal erred in law by holding that weaving of cloth from yarn supplied by the petitioner does not bring value addition to cloth and therefore, the payment made by petitioner to the weavers amount to service rendered. To support his arguments, reliance is placed on Circular No.7 of 1992 dated 18-3-1992 and No.26 of 1991 dated 24-8-1991 issued by the CBR. Further submits that petitioner being exporter of goods was exempted from provisions of section 50(4) of Ordinance, 1979 regarding deduction of advance tax from payments made to weavers under S.R.O. 368(I)/1994 dated 7-5-1994.

6.Conversely, learned counsel for the respondent-department argued that provision of section 50(4) of Ordinance, 1979 was fully applicable as manufacturing of cloth by third party from the yarn supplied by the petitioner was in the nature of service rendered. He further submits that the S.R.O. and circular No.26 of 1991 referred by the learned counsel for the petitioner relates to payment against supply of goods and not service rendered, whereas Circular No.7 of 1992 pertain to execution of contracts, hence not applicable to the petitioner's case.

7.We have heard the arguments of learned counsel for the parties and have perused the record with their able assistance. As per provision of Section 50(4) of Ordinance, 1979, any person responsible for making payment for supply of goods or service rendered is required to deduct advance tax at the time of making such payment. It is expedient to reproduce relevant clause (a) of subsection (4) of section 50 as under:--

"50. Deduction of tax at source.

..

(4)Notwithstanding anything contained in this ordinance:-

(a)any person responsible for making any payment in full or in part (including a payment by way of an advance) to any person [being resident] (hereinafter referred to respectively as "payer" and "recipient"), on account of the supply of goods or for service rendered to, or the execution of a contract with the Government, or a local authority, or [a company], [or a registered firm,] or any foreign consultant consortium shall, [ ], deduct advance tax, at the time of making such payment, at rate specified in the First Schedule, and credit for the tax so deducted in any financial year shall, subject to the provisions of section 53, be given in computing the tax payable by the recipient for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year, if any, in which the "said debt" as referred to therein, falls whichever is the later;" (Underlined by us to emphasize)

8.The Central Board of Revenue ("CBR") issued S.R.O. 368(I)/94 dated 7-5-1994 (SRO) under clause II of the proviso to subsection (4) of section 50 of the Ordinance, 1979. The said S.R.O. specified the payers and class of payers to whom subsection (4) of section 50 of the Ordinance, 1979 shall not apply. It is expedient to reproduce the relevant clauses of S.R.O. as under:--

"S.R.O.368(I)/94, dated 7-5-1994.---In exercise of the powers conferred by clause (II) of the proviso to subsection (4) of section 50 of the Income Tax Ordinance, 1979 (XXXI of 1979), hereinafter referred to as the Ordinance, and in supersession of its Notification No.S.R.O.828(I)/91, dated 24th August, 1991, the Central Board of Revenue is pleased to specify the following to be the payers, of the classes of payers to whom the said subsection shall no apply, namely:--

(i)Companies whose paid-up capital is below Rs.1.5 million;

(ii)Registered firms whose capital (total of closing balances of partners capital accounts) as per the balance sheet in respect of the latest assessment year is below Rs.1.5 million;

(iii)Persons, being exporters of goods, making payments on account of supply of such goods as are purchased in respect of goods exported outside Pakistan".

.."

9.The petitioner being an exporter is claiming exemption from provisions of subsection (4) of section 50 of the Ordinance, 1979 on the basis of exempted payer category No.(iii) in the aforesaid S.R.O. The perusal of subsection (4) of section 50 if read with aforesaid S.R.O. shows that under sub-clause (4) of section 50, any person responsible for making any payment in full or in part on account of supply of goods or for service rendered to or execution of contract shall deduct advance tax, however, under S.R.O. if such person being exporter of goods, making payment on account of supply of such goods as are purchased in respect of goods exported outside Pakistan, the provisions of subsection (4) of section 50 will not apply to said person. Plain reading of S.R.O. leaves no doubt that it relates to person making payments against "supply of goods" but it does not exempt person from applicability of subsection (4) of section 50 of the Ordinance, 1979, who is making payment to third party against service rendered or execution of contract. The terms "payment against supply of goods" and "payment against service rendered to" or execution of contract, used in sub-clause (4) of section 50 are three distinct and independent transactions. It is settled law that in a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment and presumption as to a tax. Reliance is placed in Government of Pakistan and others v. Messrs Hashwani Hotel Ltd. (PLD 1990 SC 68) and Messrs Mehran Associates Ltd. v. The Commissioner of Income Tax, Karachi (1993 SCMR 274).

10.It is not the case of the petitioner that it is a manufacturing unit weaving cloth itself. Petitioner is also not claiming that it purchased cloth directly from market. The petitioner's case is that it being an exporter was exempted under S.R.O. from deduction of advance tax, under subsection (4) of section 50 of Ordinance, 1979 from payments made to weavers against manufacturing of cloth from yarn supplied by the petitioner. Petitioner is further claiming that weaving of cloth by manufacturing unit from yarn supplied by the petitioner brings value addition to the cloth, therefore, it does not amount to service. We are afraid, the stance taken by the learned counsel for the petitioner is misconceived. Bare reading of S.R.O. shows that merely because petitioner is an exporter will not ipso-facto bring petitioner within the purview of S.R.O. The exemption from section 50(4) under S.R.O. is only available to those exporters who are making payment on account of supply of such goods as are purchased in respect of goods exported. Any payment made against service rendered or execution of contract whether it brings value addition to the goods or not, will not exclude such payment from preview of section 50(4) under the S.R.O.

11.Now the moot question require determination is whether payments made by the petitioner to manufacturing weaving units were in respect of the goods supplied or these were in respect of service rendered. The petitioner has not denied that manufacturing of cloth by third party weaving unit was being done by utilizing yarn supplied by the petitioner as per its specifications. It is also not claimed that weaving units manufactured finished cloth and supplied the same to the petitioner from their own account, without any contribution by the petitioner. In the given circumstances, we have no manner of doubt that the manufacturing of cloth by the third party manufacturing units from the yarn supplied by the petitioner as per its needs, requirements and specification will amount to service rendered or at best execution of contract but cannot be termed as payment against supply of goods for the purpose of exemption under S.R.O. It is well settled rule of construction, that since all exemptions from taxation, including SROs, increase the burden on other members of the community, they should be deprecated, except to the extent permissible by the express language of the statutes itself. All exemptions from taxation must be given a rigid interpretation against the assertion of the taxpayer and in favour of the taxing power. In this context, reliance is placed on Messrs Army Welfare Sugar Mills Limited and others v. Federation of Pakistan and others (1992 SCMR 1652).

12.Learned counsel for the petitioner heavily relied upon Circular No.7 of 1992 dated 18-3-1992 issued by the CBR to argue that conversion of yarn (supplied by the petitioner) into cloth by weaving units will bring value addition to the cloth, therefore, it will not amount to service rendered in terms of section 50(4). To examine this argument, it is expedient to reproduce relevant extract of circular as under:--

Circular No.7 of 1992-(Income Tax)

Subject:-Application of Section 80C of the Income Tax Ordinance, 1979-Clarification Regarding:-

"Workshops doing repair jobs and units engaged in value-addition process for others (viz: dying and calendaring) are not receiving payments for any service rendered to their clients within the meaning of the expression used in Section 50(4). They are the recipients of payments for the execution of contracts and are covered under Section 80C".(underlining by us to add emphasis)

Notwithstanding the question regarding the power of CBR to issue such circular and its binding effect, the bare reading of aforesaid circular shows that it pertains to execution of contract under Section 50(4)(a) of the Ordinance. As already discussed above, the transaction of execution of contract is also not covered under the S.R.O., for exemption, which is only confined to supply of goods, as are purchased in respect of goods exported outside Pakistan. Therefore, petitioner counsel reliance on this circular is mis-conceived.

13.In view of above discussion, the question raised above is answered in negative. Resultantly, both Reference applications filed by the petitioner are decided against the petitioner.

14.Office shall send copy of this judgment under the seal of the Court to the learned Appellate Tribunal Inland Revenue as per section 133(5) of the Ordinance, 2001.

KMZ/I-2/LOrder accordingly.