FINCA MICROFINANCE BANK LIMITED, LAHORE Versus The COMMISSIONER (ENFORCEMENT) PRA, LAHORE

MALIK JAVID IQBAL WAINS, J.--- This judgment shall decide the instant reference application along with T.R.(PRA) Nos.2573 of 2020, 50694 of 2021, 51994 of 2021 and 31937 of 2023 as common question of law and facts are involved in all these reference applications.

2.The instant Reference Application, being the lead case, filed under Section 67A of the Punjab Sales Tax on Services Act, 2012 ( the PSTS, Act ), has been submitted by the applicant-taxpayer, being dissatisfied with the judgment dated 23.02.2023 passed by the Appellate Tribunal of Punjab Revenue Authority, Lahore, ( the Tribunal ) wherein the following questions of law are asserted to have arisen out of the impugned judgment for our opinion:-

3.The applicant, duly registered with the Punjab Revenue Authority, was issued a show cause notice dated 15.01.2019 alleging that during the financial years 2016 and 2017, it was engaged in providing both taxable services (income from non-mark-up services) and services exempt from tax (income from mark-up/interest). It was, therefore, liable to claim proportionate input tax on purchases. The notice proposed assessment of Rs.66,227,289/- under Section 24 along with default surcharge and penalty under Sections 49 and 46(2) of the PSTS Act.

4.In response to Show Cause Notice, the applicant furnished a detailed reply vide letter dated 01.04.2019; however, the respondent authority passed an assessment order dated 03.04.2019 imposing sales tax of Rs.47,536,754/- and penalty of Rs.2,376,839/-, thereby raising total demand of Rs.49,913,591/-.

5.The applicant initially assailed the assessment order before the Commissioner (Appeals), Punjab Revenue Authority, who after affording due opportunity of hearing to the applicant, upheld the assessment order vide order dated 18.02.2020. Being aggrieved thereof, the applicant preferred an appeal before the Tribunal, which was also dismissed vide judgment dated 23.02.2023. Consequently, the present reference application has been filed before this Court.

6.Learned counsel for the applicant contends that mark-up/interest income does not constitute a taxable service within the meaning of Sections 2(45) and 3(1) of the PSTS Act. He argues that Rule 4 of the Punjab Sales Tax on Services (Specific Provisions) Rules, 2012 ( Rules 2012 ) specifically excludes interest and mark-up from the gross amount chargeable to tax; therefore, apportionment of input tax treating mark-up as exempt or non-taxable service is misconceived. Further submits that advancing money or disbursing loan does not fall within the category of service and only a fee, commission or charge in respect of such advance or loan are only taxable. It was the argument of learned counsel for the applicant that there was no concept of any exempt service under the PSTS, Act and after the amendments brought in the PSTS Act through the Punjab Finance Act, 2025, Section 3A of the very Act was introduced and now the First Schedule to the PSTS Act after amendment provides a list of tax free services , which can be termed as exempt services while the substituted Second Schedule provides a list of taxable services. Learned counsel adds that existence of a service is sine-qua-non for bringing any receipt within the mischief of these rules for apportionment of input tax, and since receipt on account of markup by the bank is not a receipt against a service , the same cannot be categorized as a markup-based service for applying the formula contained in Sub-Rule (2) of Rule-3 of the Adjustment Rules. He argued with vehemence that the provision of Section 16B of the PSTS Act cannot apply retrospectively to adversely affect the applicant. Learned counsel has placed reliance on Messrs Pak Gen Power Ltd. through Senior Manager Finance v. Commissioner Inland Revenue and 4 others (2017 PTD 495), Collector of Customs, Model Customs Collectrate v. Collector of Customs (Appeals) and another (2017 PTD (Trib.) 502) and Messrs GB Security Services (Pvt.) Limited v. The Federation of Pakistan and 4 others (2025 PTD 1159).

7.Conversely, learned counsel for the respondent-department supports the impugned judgment by submitting that Rule 3(2) of the Rules 2012 provides a lawful mechanism for apportioning input tax, where both taxable and exempt services are rendered, hence, the Tribunal has rightly upheld the assessment order.

8.We have heard the learned counsel for the parties and perused the record with their assistance.

9.The pivotal question arising for determination is whether the mark-up or interest income earned by the applicant on its investments constitutes a service within the meaning of the Act.

10.The primary contention of the learned counsel for the applicant is that, under Section 2(45) read with Section 3(1) of the PSTS Act, only services provided against consideration are chargeable to tax. It is argued that mark-up or interest income, being a financial return arising from lending or investment, does not involve the rendition of a service as envisaged under the PSTS Act. Reference in this regard is made to Rule 4 of Chapter II of the Rules, 2012, which provides that tax is payable on the gross amount charged for services, expressly excluding interest or mark-up. On this basis, it is contended that the approach adopted by the respondent-department, and upheld by the Tribunal, in apportioning input tax by treating mark-up receipts as exempt or non-taxable services is legally flawed. It is emphasized that the earnings derived in the form of interest or mark-up, though generated within the same business premises, are not the outcome of the rendition of services and are, therefore, exempted from tax. On this premise, it is contended that the apportionment formula applied by the respondent-department is illegal and without lawful authority.

11.In order to examine the contentions raised by the learned counsel for the applicant, it is deemed appropriate to refer to the relevant provisions of the PSTS Act. Section 2 of the PSTS Act contains the applicable definitions, while subsection (38) defines service or services to mean anything which is not goods, or the provision of which does not constitute a supply of goods, and includes, but is not limited to the services enumerated in the First Schedule. The Explanation appended thereto further clarifies that a service shall remain and continue to be treated as a service regardless of whether the rendering thereof involves any use, supply, disposition, or consumption of goods, whether as an essential or incidental aspect of such rendering.

12.From perusal of the First Schedule, it reveals that classification heading 98.13 pertains to financial services provided by non-banking financial institutions. Notably, sub-heading 9813.2000 specifically classifies advances and loans provided by such institutions as services under the Act. In the present case, it is not disputed that the applicant holds a valid licence granted by the State Bank of Pakistan as a Microfinance Bank and is engaged in providing a wide range of microfinance services, including loans, advances, deposit products, and branchless banking solutions. The audited financial statements of the applicant further establish that interest or mark-up income has been earned on advances and loans extended to its customers.

13.In light of the aforesaid statutory provisions and service classifications, it stands established that the earning of mark-up or interest by the applicant is an outcome of the services rendered by it and squarely falls within the definition of services as contemplated under the PSTS Act. Relevant provisions are reproduced hereinafter for convenience:

(Underlining supplied for emphasis)

FIRST SCHEDULE

(CLASSIFICATION OF SERVICES)

(see subsection (38) of Section 2)

Classification

Description

(1)

(2)

98.13

Services provided by banking companies, insurance companies, cooperative financing societies modarbas, musharikas, leasing companies, foreign exchange dealers, non-banking financial institutions and other persons dealing in any such services provided in respect of insurance to a policy holder by an insurer, including a reinsure.

9813.1000

Services provided in respect of insurance to a policy holder by an insurer, including a reinsure.

9813.1100

Goods insurance

9813.1200

Fire insurance

9813.1300

Theft insurance

9813.1400

Marine insurance

9813.1500

Life insurance

9813.1600

Other insurance

9813.2000

Services provided in respect of advances and loans

9813.3000

Services provided in respect of leasing

9813.3010

Financial leasing

9813.3020

Commodity or equipment leasing

9813.3030

Hire-purchase leasing

9813.3090

Other

9813.3900

Services provided in respect of musharika financing

9813.4000

Services provided by banking companies in relation to:

Guarantee

9813.4200

Brokerage

9813.4300

Letter of credit

9813.4400

Issuance of pay order and demand draft

9813.4500

Bill of Exchange

9813.4600

Transfer of money including telegraphic transfer, mail transfer and electronic transfer

9813.4700

Bank grantee

9813.4800

Bill discounting commission

9813.4900

Safe deposit lockers

9813.4910

Safe vaults

9813.5000

Issuance, processing and operation of credit and debit cards

9813.6000

Commission and brokerage of foreign exchange dealings

9813.7000

Automated Teller Machine operations, maintenance and management

9813.8000

Service provided as banker to an issue

9813.8100

Other

9813.9000

Service provided by a foreign exchange dealer or exchange company or money changer.

(Underlined for supplying emphasis)

14.Furthermore, subsection (45) of Section 2 defines taxable services to have the meaning assigned to it under Section 3 of the Act. Section 3 provides that, subject to the exclusions specified in the Second Schedule, a taxable service is a service listed in the Second Schedule which is provided by a person from his office or place of business in the Punjab in the course of an economic activity, including the commencement or termination thereof.

From the plain reading of aforementioned provisions, it is evident that the legislature has clearly and unequivocally demarcated the scope of services and identified the categories of services that are to be treated as taxable services. The statutory framework, particularly the First and Second Schedules read with Sections 2(38), 2(45), and 3(1) provides a comprehensive scheme for classification and taxation of services. The language employed by the legislature is explicit and leaves no scope for judicial gloss or expansive interpretation. Where the language of a statute is clear and unambiguous, it must be given its plain and ordinary meaning, in fiscal statutes, the rule of strict construction applies. Tax cannot be imposed or extended by implication, when the legislature has expressly provided what constitutes a service and the conditions under which it is chargeable, no authority, including the adjudicating officer, has the discretion to go beyond the prescribed framework. Accordingly, the services rendered by the applicant fall squarely within the definitional ambit provided by the legislature, and their classification and taxability are addressed in unambiguous terms.

15.Moreover, the Punjab Sales Tax on Services (Specific Provisions) Rules, 2012 were framed by the respondent with the approval of the Government in exercise of the powers conferred under Section 76 of the PSTS Act. Chapter II of the said Rules deals with financial services, and Rule 2 thereof delineates the scope of tax and provides that tax shall be payable by every banking company and non-banking financial institution on all non-interest-based services rendered to any person against consideration in the form of fee, commission, or charges. Rule 4 prescribes the taxable value and stipulates that tax shall be paid on the gross amount charged for services provided to customers, expressly excluding any mark-up or interest, if any. For a proper appreciation of the controversy involved, it is necessary to examine Rules 2 and 4 of the Rules, 2012, which are reproduced hereunder:-

FINANCIAL SERVICES

3. Registration

4. Taxable value. The tax shall be paid on the gross amount charged for a service provided to the customers excluding mark up or interest, if any.

From plain reading of the aforementioned Rules of Chapter II, it stipulates that the same govern financial services, determination is the taxability of income received by the applicant from its customers in the form of mark-up or interest.

16.Rule 4 unequivocally provides that tax shall be levied on the gross amount charged for services rendered to customers, expressly excluding any mark-up or interest, if any. The language of Rule 4 is clear, unambiguous, and admits only one interpretation that mark-up or interest is to be excluded from the taxable value. Rule 4 itself recognizes that services may be rendered in transactions, which generate mark-up or interest, however, the subordinate legislation has consciously excluded such components from the ambit of taxation. This exclusion reflects a deliberate legislative intent and cannot be disregarded. It is a settled principle of law that where statutory language is plain, it must be interpreted in its ordinary and natural meaning without adding to or subtracting from it.

17.In view of the foregoing discussion and the statutory definitions provided under the Act, the legislative intent is clear and leaves no room for doubt. It is an admitted and undisputed position that the income received by the applicant in the form of mark-up or interest arises in the course of providing services to its customers and is in that sense, intrinsically service related. However, by virtue of the express exclusion contained in Rule 4 of the Punjab Sales Tax on Services (Specific Provisions) Rules, 2012, such mark-up or interest does not form part of the gross amount charged for the purposes of levy of tax and, therefore, stands excluded from the taxable value. Interest or mark-up represents consideration for the use of money and, notwithstanding its nexus with the provision of services, has been consciously excluded from taxation by the subordinate legislation. Any attempt to characterize such earnings as falling outside the scope of services, despite their express recognition within the statutory framework, would be contrary to the intent of the subordinate legislation and would defeat the clear exclusion expressly provided under Rule 4. Accordingly, it is held that although the services rendered by the applicant to its customers may yield income in the nature of mark-up or interest, and such income undeniably arises from the provision of services, the same is expressly excluded from the taxable value under Rule 4. Consequently, while mark-up or interest falls within the scope of services rendered by the applicant, it remains exempted from the levy of tax thereunder.

18.Further, it is an admitted and undisputed fact that the applicant-taxpayer is a registered entity with the respondents, providing both taxable services in the form of non-mark-up receipts and non-taxable or exempt services in the form of mark-up or interest receipts from the same business premises. It is also not denied that the applicant has claimed adjustment of one hundred percent (100%) of the input tax paid on the procurement of goods and services, without any bifurcation or apportionment of input tax between taxable and non-taxable receipts, treating the entire business as a single taxable activity. Such conduct is prima facie in clear contravention of Rule 3(2) of the Punjab Sales Tax on Services (Adjustment of Tax) Rules, 2012. Rule 3(2) of the aforesaid Rules expressly provides that where an input is used in providing both taxable services and non-taxable or exempt services, the input tax shall be apportioned in accordance with the prescribed formula for the purpose of availing input tax adjustment or deduction. For proper appreciation of the issue, the relevant provision is reproduced as under:

=

Value of Taxable supplies X total Input Tax

Value of taxable and exempt

19.In light of foregoing provision, as well as Rules 2 and 4 of Chapter II of Rules, 2012, it is evident that a non-banking financial institution is liable to pay tax on all non-interest-based services rendered for consideration in the form of fees, commissions, or charges. The tax is to be levied on the gross amount charged for such services, with any mark-up or interest expressly excluded for the purposes of apportionment.

20.Accordingly, it is an admitted legal position that income received by the applicant in the form of mark-up or interest arises from the provision of services, though such income stands excluded or exempt from tax under Rule 4. Consequently, where both taxable services (non-mark-up receipts) and non-taxable or exempt services (mark-up or interest receipts) are rendered from the same business premises, the apportionment formula prescribed under Rule 3(2) is mandatorily applicable for determination of adjustable input tax.

21.When read conjointly, the aforementioned Rules unequivocally provide a complete statutory mechanism for apportionment of input tax in cases where a taxpayer provides both taxable and non-taxable or exempt services from the same business premises. Any adjustment of input tax without such apportionment is not sustainable in law.

22.The reliance placed by the learned counsel for the applicant on various judicial precedents is misplaced. The cited authorities are distinguishable on facts and pertain to different statutory provisions, and therefore do not apply to the issues involved in the present matter, which require interpretation strictly in accordance with the relevant provisions of law and the factual matrix of this case.

23.In view of the foregoing, the Tribunal was fully justified in upholding the orders-in-original and has rightly passed the impugned judgments. Consequently, the proposed questions of law are answered in the negative. The reference applications are, accordingly, decided against the applicants-taxpayer and in favour of the respondents-department.

24.Office to transmit copy of this judgment under the seal of the Court to the Appellate Tribunal in terms of Section 67A(4) of the Punjab Sales Tax on Services Act, 2012.

MQ/F-4/L References dismissed