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ISLAMABAD: A division bench of the Sindh High Court (SHC) has rejected reference application/ writ petitions of local indenters, claiming their services to foreign exporters do not come under the ambit of provincial sales tax on services.

The SHC has issued a judgment (CP D5791 of 2016) to decide 77 other petitions and 17 Sindh Sales Tax reference applications.

In this regard, the SHC’s division bench has rejected reference application/ writ petitions of local indenters having foreign indenting commission. The SHC has held that the foreign indenting commission is liable to Sindh Sales Tax on services because it is a service. The contention has been raised by the indenters that no service is being provided to the local person who has imported goods from outside Pakistan. Therefore, no sales tax on services is to be levied by the provincial sales tax authorities.

Moreover, the emoluments received from outside Pakistan are not liable to tax by the province, but only by the federal government.

The SHC judgment stated that this bunch of cases consists of four categories. Category “A” is a bunch of references filed by the alleged indenters against the order of the Tribunal bringing them within the frame of Sindh Sales Tax on Services Act, 2011 (SSTA 2011). The second category “B” includes those references which are filed by the department against the same judgment of the Tribunal in respect of a portion that concerns with fine/ penalty only.

Category “C” is a bunch of petitions which are filed by the alleged indenters who, apart from filing the petitions, have also exhausted statutory remedy under SSTA 2011, and their References are attached as category “A”. The next category “D” is of cases/ petitions which have directly been filed, without undergoing a process of statutory determination. All these categories of cases have been bunched together as primarily common questions are arising out of them, which questions shall be answered and decided by this common judgment and hence, we propose to do the same.

In order to understand the controversies involved in referred cases, the SHC may sum up the possible questions that may originate from the proceedings in consideration of the propositions of the counsel, which are as under: (i) Whether the business activities of the petitioners/ applicants, who are identified as indenters are covered by SSTA 2011? (ii) Whether the Province of Sindh has legislative competence to tax the services of the indenters serving in this province and, hence, are liable to be registered under SSTA 2011? (iii) Whether under the provisions of SSTA 2011, it is the service providers/ indenters who are required to be taxed without being passed on to the recipients of the goods? (iv) What could be the value of services for the purposes of SSTA 2011? (v) Whether the business activities of the indenters constitute import and export of goods and/or extra territorial application and hence the province of Sindh lacks competence in legislating the subject law? (vi) Whether the tax under question is tax on income of the indenters? and (vii) Whether fine/penalty was rightly reduced by the Tribunal?

Foreign income assets, liabilities: SC suspends SHC verdict

It is the indenters case that they do not have any contractual relationship with the local parties receiving the goods from foreign exporters and hence in the first instance it may be a transaction of direct import by the local party through foreign entity and any understanding between foreign principal and the indenters does not come within the clutches of at least the subject provincial statute SSTA 2011.

Conversely, the privacy of contract between applicant/ indenters and foreign principal is a document, which is governed by foreign laws including foreign arbitration. These indenters claimed to have been paid fixed emoluments by principal and that too on the conclusion of sale of goods to the local party by its foreign principal.

It is claimed that since the amount is received in foreign exchange as remittance through banking channels, it is only the federation that could impose tax on such foreign remittance.

The SHC has said that the indenters are neither termed as importer nor exporter. Perusal of entire provisions of Section 154 read with Division IV Part III of the First Schedule of Income Tax Ordinance, 2001 takes us to the conclusion that when it talks about indenter all it requires is that authorized dealer of the bank may deduct a required percentage of the remittances as commission received by the indenters. There is nothing to show in the context of the said provisions for a treatment that the very activity of indenters is either import or export of goods.

The SHC concluded that there is no space of interpretation provided by petitioners in relation of Foreign Exchange Manual read with Section 154 of Income Tax Ordinance, 2001. Similarly, there is no applicability of extra territorial operation for giving effect to Article 141 of the Constitution. The doctrine of occupied field would also not come into play as we are of the view that Entry 49 of Federal Legislative List, as structured after 18th Amendment, empowers the province to legislate on the subject under consideration. The legislative powers defined under Article 141, 142 and 143 of the Constitution have not been violated while encompassing services rendered by indenters to be within the frame of SSTA 2011 and find its place within exclusion defined in Entry 49 of Federal Legislative List of Fourth Schedule of Constitution.

In view of the above, the SHC’s answer to the proposed questions No (i), (ii), (iii) and (vii) in affirmative, whereas, questions No (iv) accordingly and (v) and (vi) in negative, all against petitioners/indenters and in favour of Sindh Revenue Board. The result of the discussion is that all Sindh Sales Tax Reference Applications and petitions, Categorized as ‘A’, ‘B’, ‘C’ and ‘D’, are dismissed with no orders as to costs, SHC judgment added.

Copyright Business Recorder, 2022

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