COMMISSIONER OF INCOME TAX VS KHUSHNOOD AHMED, 2016 PTD-LAHORE-HIGH-COURT-LAHORE 1146 (2015)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 133 & 153---Reference---Payments for goods and services---Omission of word 'professional' from S.153(9)(b), Income Tax Ordinance, 2001---Effect---Income tax authorities contended that exclusion from federal tax regime was only for 'professional' services and not for other services---Validity---If legislature intended to restrict the provision only for professional services, for taxation under federal tax regime, there was no need to omit the word 'professional' from S.153(9)(b) of Income Tax Ordinance, 2001---Sale of goods under clause (a) and services under clause (b) of S. 153(9) of Income Tax Ordinance, 2001, were specifically excluded in 153(9)(c) of Income Tax Ordinance, 2001---Authorities while interpreting S. 153(9)(c) of Income Tax Ordinance, 2001, in their own manner were ignoring grammatical rule that phrase 'other than a contract for' would also be read as the phrase 'the rendering of or providing of services', besides reading it with the phrase 'the sale of goods'---Expression 'rendering of or providing of services under a contract' would be excluded from clause (c) of S. 153(9) of Income Tax Ordinance, 2001---Reference was dismissed in circumstances.

Messrs Premier Mercantile Services (Pvt.) Ltd. v. Commissioner of Income Tax, Karachi 2007 PTD 2521; Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Rehman Enterprises 2008 PTD 1897; Commissioner of Income Tax v. Cress Gas Carriers, Sahiwal 2010 PTD 2349; Commissioner Inland Revenue (Legal) RTO v. Ever Green Trading Co. 2011 PTD 549 and Messrs Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others 1993 SCMR 1232 ref.

Muhammad Asif Hashmi for Applicant.

Ehsan-ur-Rehman Sheikh, Amjad Hussain Malik, Liaquat Ali Chaudhry, Javed Athar, Muhammad Yahya Johar, Shahid Sarwar Chahil, Saba Saeed Sheikh, Qamar Farooq, Muhammad Zahid on behalf of Sajjad Haider Rizvi and Bashir Hussain Ch. on behalf of Mian Yusuf Umar, for Applicants in connected Tax References.

Nadeem Mahmood Mian, Standing Counsel.

Mehmood Aslam Lilla, Director Law (FBR) and Babar Nawaz, Deputy Director (FBR).

Waheed Shahzad Butt, for Respondent.

Muhammad Ajmal Khan and Moshtaq Ahmad Mohal, for Respondents in connected Tax References.

Date of hearing: 30th November, 2015.

JUDGMENT

SHAHID JAMIL KHAN, J.---This judgment shall also decide connected Tax References, enlisted at the bottom of this judgment, seeking interpretation of Section 153 of the Income Tax Ordinance, 2001 ("Ordinance of 2001"), relating to the sector providing/rendering services.

The provisions of the Section 153 had undergone number of amendments during Tax Years 2003 to 2006 regarding service sector's taxation under Final Tax Regime ("FTR"). The amendments caused confusion in the mind of applicant department, as well as, respondent taxpayers.

2.Brief legislative history of the amendments is necessary to answer the proposition:

The Ordinance of 2001 was enforced w.e.f. 01.07.2002, when word "professional" was available in clauses (b) and (c) of Section 153(1), however, it was omitted and definition of "professional services" was inserted in Section 153(9) by Finance Act, 2002. It is important to note that the amendment was available in the statute from the date of its inception.

Subsection (6) of Section 153 of the Ordinance of 2001 was dealing with FTR and transactions under Section 153(1) (a) and (c) were mentioned for this purpose. Omission to mention clause (b) in subsection (6) was with intent of excluding the transactions covered under this clause from being taxed under FTR.

3.In very next year, through Finance Act, 2003, word "professional" was omitted also from the definition under Section 153(9), which changed the nature of definition from "professional services" to "services" only. Through Finance Act, 2005, word "providing" was inserted in the clauses (b) and (c). Provisions of Section 153 remained in the position, ibid, till its complete substitution through Finance Act, 2011. Provisions of Section 153(1), (6) and (9) as available before substitution by Finance Act, 2011 are as under:--

"153. Payments for goods and services.---(1) Every prescribed person making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person-

(a)for the sale of goods;

(b)for the rendering of 1[or providing] 2[ ] services;

(c)on the execution of a contract, other than a contract for the 3[sale] of goods or the rendering of 4[or providing of] 5[ ] services, shall, at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division III of Part III of the First Schedule.

(6)The tax deducted under this section shall be a final tax on the income of a resident person arising from transactions referred to in 6[clause] (a) or (c) of subsection (1).

(9) In this section,-

...............

"7[ ] services" includes the services of accountants, architects, dentists, doctors, engineers, interior decorators and lawyers, otherwise than as an employee 8[ ]

4.The Reference Applications, under consideration, are instituted by department. Stance of applicant department remained throughout that exclusion from FTR was only for "professional services" and not for other services. Department also interpreted the clause (c) in a manner that services provided under an agreement/contract were not excludable from it, therefore, fell in FTR. Departmental stance is reiterated in different questions of law, which are arising out of impugned decisions by Appellate Tribunal Inland Revenue ("Appellate Tribunal").

For brevity, we intend to resettle the proposed questions in following shape, to answer the propositions of law in all the cases:-

"(a)Whether the Appellate Tribunal was justified to hold that services under Section 153(1)(b) of the Income Tax Ordinance, 2001 read with its definition under subsection (9) are not restricted to professional services?

(b)Whether Appellate Tribunal was justified to ignore the impact of inserting word "provided" in clause (b) of Section 153(1) of the Income Tax Ordinance, 2001 through Finance Act, 2005, which fortifies departmental interpretation?

(c)Whether Appellate Tribunal was justified to exclude the services provided under an agreement/contract from the transactions envisaged under clause (c) of Section 153(1) of the Income Tax Ordinance, 2001?"

5.Mr. Mehmood Aslam Lilla, Director Law (FBR), with permission, argued the case for Applicant department. Placing reliance on a judgment by learned Sindh High Court in Messrs Premier Mercantile Services (Pvt.) Ltd. v. Commissioner of Income Tax, Karachi (2007 PTD 2521), he argued that doctrine of ejusdem generis was rightly applied by learned Sindh High Court while interpreting the definition of 'services' to hold that only professional services, which require professional degree may be included in the definition; submitted that this aspect had been overlooked in some of the judgments passed by this Court, as well as, learned Peshawar High Court. Further submitted that after insertion of word "providing" in the clauses (b) and (c) through Finance Act, 2005 the issue stood more clarified that earlier clause (6) was dealing only with the rendering of services by professionals. He also referred Circular No.06 of 2003 dated 09.07.2003 to reiterate that services as defined in the Section 153(9) meant Professional Services only.

His arguments were adopted by all learned counsel for the applicant department.

6.Mr. Waheed Shahzad Butt, Advocate, learned counsel for the respondents opposed the arguments and apprised that the proposition in hand had been answered by this Court in Commissioner of Income Tax/Wealth Tax, Multan Zone, Multan v. Rehman Enterprises (2008 PTD 1897), which was followed in Commissioner of Income Tax v. Cress Gas Carriers, Sahiwal (2010 PTD 2349). A copy of unreported judgment by Hon'ble Supreme Court of Pakistan in Civil Appeals Nos. 1045-1052 of 2008 dated 22.02.2011 was produced, whereby both the judgments, ibid, by this Court were upheld. Also submitted that learned Peshawar High Court had followed the ratio of above noted judgments by this Court in its judgment in Commissioner Inland Revenue (Legal) RTO v. Ever Green Trading Co. (2011 PTD 549).

7.Mr. Muhammad Ajmal Khan, Advocate for the respondents added that the omission of word "professional" by the legislature from very inception of the Ordinance of 2001 and subsequent omission of word "professional" from definition under the subsection (9) clearly showed that the legislature had intended to include all types of services in the definition.

8.Heard, record perused.

9.We readily agree with the submissions made by Mr. Muhammad Ajmal Khan, Advocate for the respondents. Had legislature intended to restrict the provision only for professional services, for taxation under FTR, there was no need to omit the word "professional" from the clause (b) and from the definition under subsection (9). In Rehman Enterprises' Case (supra), learned Division Bench of this Court has already held that the word "includes" used in the definition of services enlarges the scope of the services envisaged under the clause (b). This interpretation is followed by another Division Bench of this Court in the Cress Gas Carriers' Case, as well as, by Peshawar High Court in the Ever Green Trading's Case. After the decision by Hon'ble Supreme Court of Pakistan both the judgments by different Division Benches of this Court stood merged in the judgment by Apex Court, which is binding on all the concerns including this Court under Article 189 of the Constitution of the Islamic Republic of Pakistan, 1973. The argument by Director Law (FBR) that only Circular No.11 of 1991 was discussed by Hon'ble Supreme Court, is misconceived. Both the judgments were upheld, after reproducing operative part from the Rehman Enterprises' Case, the same is reproduced hereunder for ease of reference:--

"6. The provisions of section 153(1)(b) of the Income Tax Ordinance relate to "rendering or providing" of services. Deletion/omission of the word "professional" through Finance Ordinance, 2002 enlarges the scope of the enactment. The tax deducted under section 153(1)(b) by virtue of proviso to subsection (6) is not final to discharge of tax liability. It does not, therefore, fall within the presumptive tax regime. Section 153(1)(b) has to be read in conjunctions with subsection (9) where the enactment has itself defined by the term "services". Term "includes" has consciously been used to enlarge the scope of services to other services, i.e. which have not specifically mentioned. The provisions of section 153(9) read with clause 2(a) of Division III of Part (iv) of the First Schedule to the Income Tax Ordinance, 2001, convey the intention of the legislature that the services of carriage contractor fall within the ambit and scope of section 153(1)(b). The Tribunal was right in observing that Circular No. 11 no more holds the field, with repeal of the Income Tax Ordinance, 1979. It was rightly held that Circular No. 11 is neither relevant nor applicable, in respect of matters falling under Income Tax Ordinance, 2001, as the same (Circular 11) explains the relevant law under Repealed Ordinance, 1979. The taxpayers/carriage contractors are providing services for its principal company, therefore, their returns are to be adjudged from this angle only. No scholarly interpretation is required in these Tax Reference applications. For the carriage contractor is covered under clause 2(a) of Division III of Part (iv) of the First Schedule to the Income Tax Ordinance, 2001 and that sufficiently conveys the intention of the legislature that carriage contractor falls within the purview of "services" as envisaged in section 153(1)(b)."

(emphasis supplied)

10.In presence of binding judgment by Hon'ble Supreme Court of Pakistan, reliance on the judgment by learned Sindh High Court in Messrs Premier Mercantile Services' Case (supra) is not required to be considered.

For the reasons noted above and in light of judgment by Hon'ble Supreme Court, our answer to Question No. (a) is in Affirmative, i.e., against the applicant department.

11.We are not impressed by arguments on behalf of applicant department that insertion of the word "provided" in the clauses (b) and (c) has clarified the departmental stance. While recapitulating legislative history, it is noticed that phrase "rendering of professional services" was used by legislature originally, however, word "professional" stood omitted on the day when Ordinance was enforced. Latter, word "professional" was omitted even from the definition. Import of word "include", as used in the definition and explained in the Rehman Enterprises' Case, has been upheld by Hon'ble Supreme Court. In our opinion, presence of word "includes" in the definition of services, in backdrop of conscious exclusion of word "professional", insertion of the word "providing" in the clauses (b) and (c) is clarificatory and curative in nature, to elaborate the existing provision of law. We, therefore, do not agree with the interpretation of Federal Board of Revenue ("FBR") in the Circular No.06 of 2003.

Needless to say that judicial interpretation of any provision by FBR is not binding, as is settled by Hon'ble Supreme Court in M/s Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others (1993 SCMR 1232).

Our answer to Question No.(b) is also in Affirmative, i.e., against the applicant department.

12.So far Question No.(c) is concerned, in our opinion, this issue has also been resolved in the Rehman Enterprises' Case, as upheld by Apex Court; In that case, Carriages Services were provided, by taxpayer, under a contract. Crux of the judgment is that services under contract were excluded from clause (c) for the purpose of charging tax under Section 153(1) and from FTR under its subsection (6).

In addition, it may be observed that sale of goods, under clause (a), and services, under clause (b) are specifically excluded in clause (c) to specify payments on the execution of contract. For emphasis, the clause (c) is reproduced:--

"(c) on the execution of a contract, other than a contract for the sale of goods or the rendering of or providing of services."

(emphasis supplied)

Department, while interpreting this clause in their own manner, is ignoring the grammatical rule that phrase "other than a contract for" shall also be read with the phrase "the rendering of or providing of services", besides reading it with the phrase "the sale of goods". In simple words 'rendering of or providing of services under a contract' shall be excluded from the clause (c). Our answer to Question No.(c) is also in Affirmative, i.e., against the applicant department.

All Reference Applications are decided against the applicant department.

13.This judgment shall also decide PTR Nos. 343, 344, 375, 508, 610, 718 of 2008, 85, 127, 128, 129, 130, 155, 156, 201, 371, 372, 373, 374 of 2009, 163, 164, 165, 166, 173, 174, 175, 176, 206, 207, 208, 209, 354, 355, 356, 591, 592, 593, 594, 595, 596 and 597 of 2010.

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

MH/C-3/LReference dismissed.