Chief Commissioner/ Commissioner IR Zone-II/Zone-III, RTO, Peshawar vs
The appellant, the Chief Commissioner Inland Revenue, challenged a High Court judgment that favored taxpayers regarding their claims for tax refunds. The respondents, who operated petrol pumps in the Federally Administered Tribal Areas (FATA), sought refunds for taxes deducted under Section 156A of the Income Tax Ordinance, 2001, arguing that the Ordinance did not extend to FATA. The core legal question was whether income derived from commissions or discounts on petroleum products, where the contractual arrangements and tax deductions occurred outside FATA, was immune from taxation under the Ordinance of 2001. The Supreme Court held that the tax deduction under Section 156A constituted a final tax regime on income arising from the commission or discount, which occurred in taxable areas outside FATA. The Court ruled that mere operation of business premises in FATA does not grant immunity from taxation; the taxpayer must prove the taxable income was not derived from areas where the statute applies. Consequently, the Court allowed the appeals, setting aside the High Court's judgment, as the respondents failed to establish such immunity.
- Does the operation of a business within the Federally Administered Tribal Areas (FATA) automatically grant immunity from the application of the Income Tax Ordinance, 2001?
- Is tax deducted under Section 156A of the Income Tax Ordinance, 2001, on commissions or discounts for petroleum products considered a final tax?
- Where a contractual arrangement and the resulting income (commission) arise outside the territorial limits of FATA, can the taxpayer claim immunity from the Income Tax Ordinance, 2001?
- Section 156A, Income Tax Ordinance 2001
- Article 247(3), Constitution of the Islamic Republic of Pakistan 1973
- Section 170, Income Tax Ordinance 2001
- Section 129, Income Tax Ordinance 2001
- Section 133, Income Tax Ordinance 2001
- Division VI A of Part III of the First Schedule, Income Tax Ordinance 2001
ORDER
Athar Minallah, J. The Chief Commissioner/ Commissioner (`appellant') had impugned the judgment of the High Court, whereby the questions of law were answered in favor of the taxpayers.
This Court had granted leave and consequently the petitions were converted into appeals.
2. The respondents in all these appeals are engaged in the business of purchase of petroleum products and its subsequent sale to the retail consumers. They assert that the retail sale of petroleum products is made by them through the petrol sale stations (`petrol pumps') established, operated and managed by them in the Federally Administered Tribal Areas (FATA'). The petroleum products are purchased from companies incorporated in Pakistan and the respective agreements are executed outside the territorial limits of FATA. The companies selling the petroleum products pay commission or give a discount to the purchasers. This contractual arrangement between the seller and buyer of the petroleum products is distinct from the further sale to the consumers through the petrol pumps. The former activity generally takes place in Pakistan outside the territorial limits of FATA. Section 156 A of the Income Tax Ordinance, 2001 (Ordinance of 2001') makes it a mandatory obligation of the person selling the petroleum product to a petrol pump operator to deduct tax from the amount of the commission or discount allowed by the latter at the rate specified in Division VI A of Part III of the First Schedule ibid. This deduction is in the nature of a final tax regime since subsection 2 of section 156 A declares it to be the final tax. In the cases before the Court, the companies selling the petroleum products to the respondents had deducted the tax from the amount of commission paid to or discount allowed by the latter. The respondents filed applications for refund of the amount deducted as tax under section 156 A of the Ordinance of 2001 solely on the ground that the enforcement of the Ordinance of 2001 was not extended to the territorial limits of FATA in accordance with law and the constitutional mandate expressly provided under Article 247(3) of the Constitution of the Islamic Republic of Pakistan, 1973 (`Constitution'). It is not disputed that the President had not directed that the Ordinance of 2001 shall apply to FATA. The applications filed under section 170 of the Ordinance of 2001 were dismissed by the taxation officer on the basis of a letter dated 23.11.2011 issued by the then Central Board of Revenue. Moreover, it was further held that the provisions of the Ordinance of 2001 were attracted because of the payments having been made by the respondents in the settled/ taxable areas. The appeals preferred by the respondents under section 129 of the Ordinance of 2001 were allowed by the Commissioner Inland Revenue (Appeals) on the sole ground that the business was being carried on in an area where the Ordinance of 2001 did not apply. The department challenged the orders but the appeals were dismissed by the Appellate Tribunal Inland Revenue (Tribunal). The High Court answered the question of law against the department in response to the questions proposed in the references filed under section 133 of the Ordinance of 2001.
3. We have heard the learned counsel for the appellant-department as well as the counsel for the respondents. It is not disputed that the enforcement of the Ordinance of 2001 was not extended to the territorial limits of FATA and, therefore, its provisions were not attracted to the income arising therein. It is also not disputed that the respondents are operating petrol pumps in FATA. Section 156 A of the Ordinance of 2001 provides that every person selling petroleum products to a petrol pump operator shall deduct tax from the amount of commission or discount allowed to the operator at the rates specified in Division VI A of Part III of the First Schedule. The tax deductable under sub section 1 shall be a final tax on the income arising from the sale of petroleum products. It is noted that the obligation of deduction of tax is on the person selling the petroleum products to the operator of the petrol pump while the said deduction is relatable to the commission paid to or discount allowed by the latter. In the case of the appeals before us, the respondents assert to be operators of petrol pumps and they were claiming refund of the tax deducted from their commission by the persons who had sold the petroleum products to them. The factum of income having been accrued was on account of the commission paid to the respondents for the sale of petroleum products and not the sale of the petroleum products to the consumers at the petrol pumps operated in FATA. As already noted, the deduction of tax fell under the final tax regime.
Admittedly, the contractual arrangement for the sale of petroleum products, the actual sale and payment as well as deduction of the tax had taken effect in the areas of Pakistan outside the territorial limits of FATA and, therefore, the transactions and the income arising from such sale were not immune from the enforcement of the provisions of the Ordinance of 2001. The income derived by the respondents was on account of commission paid to them by the seller companies outside FATA. This Court has already held that immunity from the payment of taxation under the Ordinance of 2001 shall not be claimed merely on the basis that the business premises have been established in FATA, rather the onus was on the tax payer to establish the fact that taxable income was not being derived from the area where the statute was enforced and applicable.[1] This crucial factum could not be successfully established by the respondents and their refund claims were, therefore, justifiably rejected by the taxation officer. It appears that the appellate authorities, as well as the High Court, were not correctly assisted regarding the scope and nature of the deduction of tax under section 156 A of the Ordinance of 2001. It also appears from the record that the taxation officer had received photocopies of applications from the respondents claiming refunds under section 170 of the Ordinance of 2001. The contractual arrangement between the companies selling the petroleum products to the respondents was not properly disclosed by the respondents.
Nonetheless, the claim of refund of the tax deducted under section 156 A of the Ordinance of 2001 was not tenable and, therefore, rightly rejected.
4. For the above reasons, all these appeals are allowed and consequently the respective judgments of the High Court and other appellate forums are hereby set aside.
1. C.I.T. v. Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd. (2008 PTD 169)