1. ' The appeal has been filed by the appellant against the order dated 15-7-2009 of the respondent No,3 on the following grounds:--
(1) That the order of the CIT(A) Islamabad is bad in law and against the facts of the case.
(2) That the learned CIT(A) was not justified to delete the add backs under the head activation tax claimed as expense by the taxpayer, without appreciating that the taxpayer is just a collecting
(sic) with regard to the levy of subject tax.
(3) That the learned CIT(A) was not justified to delete the addition made on account of free air time without appreciating that the taxpayer company has not offered revenue earned against the said expense.
(4) The learned CIT(A) was not justified to delete the additions on account of payments made to National Telecommunication Corporation as per section 21(c) of Income Tax Ordinance, 2001 without appreciating the fact that National Telecommunication Corporation is a registered taxpayer under specific NTN being assessed at Large Taxpayer Unit Islamabad.
(5) That learned CIT(A) was not justified to direct that the advertisement expenses should be allowed in the same year without appreciating the contents of section 24(3) of the Income Tax Ordinance, 2001.
(6) That the appellant may be allowed to add, amend or alter any ground of appeal on or before the date of hearing.
2. Brief facts of the case are that the respondent No,1 filed its income tax return for the year 2006 and declared loss of Rs,7,890,444,222. The case was selected for audit under section 177 of the Income Tax Ordinance, 2001 and the respondent No,2 amended the assessment vide order dated 30-4-2009 under section 122(1) of the Act ibid by disallowing various expenses claimed by the respondent No,1 which have been discussed in detail head wise below. Aggrieved by the order dated 30-4-2009 the respondent No,1 filed appeal before the Commissioner of Income Tax/Wealth Tax (Appeals-1), Islamabad. Extending relief to the respondent No,1 CIT(A) i,e, respondent No,3 partly allowed the expenses as disallowed by the respondent- No,2. Dissatisfied with the order of the respondent No,3 dated 15-7-2009 the appellant filed the instant appeal on the grounds as mentioned in Para (1) above.
3. Date of hearing in the case was fixed on 15-8-2009 and finally heard on 15-2-2011. We have heard arguments of the parties to the case. The appellant reiterated his grounds of appeal and requested for setting aside the order dated 30-4-2009 passed by the respondent No,3. On the other hand the counsel of the respondent No,1 argued his case on the following grounds:--
4. Arguments on behalf of the Respondent No,l. 4.1 That the order issued by the learned Taxation Officer under section 122(1) of the Income Tax Ordinance, 2001 is bad in law on facts and circumstances of the case. He argued that an assessment order can only be amended on the basis of definite information which in the instant case is lacking. The details of expenses which were claimed by the respondent No,1 were gathered through audit which do not constitute definite information hence the order passed by the Assessing Officer is illegal, null and void.
2. 4.2 That order issued by the learned taxation, officer is illegal, null and void in the presence of all information supplied to the respondent No,2 during the course of audit.
3. 4.3 The learned taxation office has erred in disallowing the amortized expenses of activation tax for an amount of Rs,221,377,000. He argued that under clause 7(A) of the cellular services agreement the activated SIM has validity period of 12 months and the company's cost represents net charges/ expenses which is net of the customer's share in cost. He further stated that it is not a tax which has been paid on profits or gains. He further argued that various local, municipal, provincial and other taxes paid by the company are duly allowed as admissible deductions then there leaves no room for the respondent No,2 to disallow the same without stipulation. To give further support to his contention he stated that the cellular operators have been made responsible for payment of activation tax and any default may result in action against them. Hence disallowance of activation tax by the respondent No,2 is against the spirit of law and rules framed under the Income Tax Act, 2001.
4. 4.4 The learned Taxation Officer has erred in making disallowance on account of free air time amounting to Rs,357,132,000 despite the fact that evidence for payment of Federal Excise Duty and payment of tax under section 236 was submitted to him (as was stipulation by him to allow the said expense). He stated that the officer directed the respondent No,1 that if he sought some expenses to be allowed on this account he has to produce evidence of payment of federal excise duty and withholding tax. The payment proof of federal excise duty and withholding was enclosed as evidence, yet disallowance of expenses is beyond comprehensions.
5. 4.5 The learned Taxation Office has erred in disallowing an amount of Rs,3,883,891 under the head of line leased charges of National Telecommunication Corporation. He argued that out of an amount of Rs,169,223,634 on account of leased line charges an amount of Rs,165,339,743 was paid to Messrs PTCL who hold an exemption certificate under section 153 issued by the respective Commissioner of income tax. However, for the remaining amount of Rs,3,883,891 was paid to Messrs N.T.C. Who is a government entity and exempt from tax under section 49(3) of the income Tax Ordinance, 2001. Therefore, the respondent has rightly claimed non-deduction of withholding tax.
6. 4.6 The learned taxation officer has erred in disallowing advertising expenses of Rs,429,896,700.
7. Such expenses comprise of advertising for company's service in electronic and print media, for printings of pamphlets, flyers, advertisement in news papers, magazines, sponsorship of charity shows, exhibition, tournaments, hiring of celebrities etc. In addition it also relates to various offers/packages which were valid on special occasions (like eid) and such promotion had a validity of a period less than a year. The expense on this score is only limited for a specific year and cannot be construed of either capital or permanent nature. The counsel of the respondent No,1 further stated that it is common feature of telecom industry to spend such expenses for the benefit of the consumers. Such expenditure is of a recurring nature on year to year basis in order to mitigate cut throat competition. He relied on the judgment of the Income Tax Appellate Tribunal
(ITAT) in their order I.T.A. No,1334 of 1962-1963 reported as 1967 Tax 30 (Trib.).(sic)
8. 4.7 That the learned taxation officer has erred in disallowing the amount of initial allowance and depreciation claimed on network equipment for an amount of Rs,154,980 and Rs,1,033,200 respectively. He argued that the software in question against which initial allowance and depreciation claimed were embedded software's in the equipment and cannot be separated.
9. Therefore, these software's do not fall within the ambit of computer software's that has been included in the definition of "intangibles" in section 24(11) of the Income Tax Ordinance, 2001. He further argued that these software's in isolation cannot perform independent function in any computer equipment being of its specialized nature.
10. 4.8 The learned Taxation Officer has erred in short allowing credit for taxes paid/suffered at source by the company as claimed by your Honor's appellant. The counsel of the respondent No,1 stated that in terms of section 113(2)(c) of the Income tax Ordinance, 2001 a company is entitled to adjust minimum tax paid in subsequent five years if it has taxable profits. The taxation officer has allowed credit for taxes paid/suffered only to the extent of tax liability due whereas the company has paid in excess of the same. Such treatment is against the provisions as contained in the aforesaid provision of law needs to be done away with.
11. 4.9 The learned Taxation Officer has not assessed the amount of minimum tax available for adjustment against future tax liability in accordance with the provision of section 113(2)(c) of the Income Tax Ordinance, 2001.
5. The D.R/L.A. On his turn fully supported the order dated 30-4-2009 passed by the respondent No,2 and grounds of appeal of the appellant. The D.R/L.A reiterates his contention on each issue narrated in Para 4 above. Juxtaposing the rival position of the A.R/D.R., we enter our findings on the grounds of appeal as follows:-- 5.1 Findings on Paras 4.1. And 4.2.
12. The D.R./L.A. Stated that the issue raised by the appellant is procedural one and the law favors, adjudication on merit rather than technicalities. The respondent No,1 was apprised through show- cause notice of the grounds of the assessment which contained detailed account of the basis on which the expenses claimed by the respondent No,1 were declared inadmissible. ''he grounds contained in the show-cause notice constitute definite information. The show-cause notice also lists the discrepancies noticed, by the taxation officer in the respondent's income tax return.
13. ' We find that not only there is a full disclosure of definite information to the taxpayer but also sufficient opportunity of being heard was provided to the taxpayer by the respondent No,1 who after giving consideration to the respondent's point of view passed a valid order under section 122(1) of the Income Tax Ordinance, 2001. There is no legal infirmity in the revised assessment order of the respondent No,2. Hence the same is sustained.
14. 5.2 Findings on para 4.3.
15. The D.R/L.A. Argued that activation tax is a combined levy of customs duty and sales tax chargeable to every new mobile user on activation of new cellular connection levied vide S. R.O.391(O/2001, dated 18-8-2001. The respondent No,1 is working as a collecting agent on behalf of the Federal Government. The activation tax liability is of the customer and not the company which acts as a "withholding agent". The D.R./L.A. Argued that if for the sake of discussion it is assumed that the respondent company has paid activation charges herself instead of collecting it from the customers, then the same should have appeared as "amount receivable" in the accounts of the company which is not case here. The company's annual audited account does not reflect this sum as paid and payable by the company. The company has thus tried to defeat the purpose of law by charging undue expenses on its profit and gains during the period under reference. Replying to the arguments of the respondent No,1 that various local, municipal and other taxes paid by the company are duly allowed as admissible deductions then the expenses claimed on activation charges are also admissible is contrary to the spirit of law. The D.R./L.A stated that as earlier discussed the payment of activation tax is the responsibility of the customer and not that of the cellular mobile company. Moreover, clause 7(A) of the cellular service agreement referred to by the respondent company has no nexus with the tax on activation charges levied under S.R.O.391(I)/2001,dated 18-8-2001 and thus claiming of expenses of Rs,221,377,000 is not admissible and requires to be added back.
16. ' We have given due consideration to the above contention of the A.R/D.R/ L.A. However, first of all it is to be seen whether there is any relevance in the taxpayer's claim that activation charges were based on "commercial expediency" and secondly whether these expenses on account of collection of 'activation tax" were lawfully claimed by the taxpayer.
17. Commercial expediency: " The expression commercial expediency means and includes an expenditure which a' prudent man might incur for the purpose of business provided it is not entirely gratuitous and unconnected with the business".
18. ' The plain reading of the above definition would reveal that the collection of activation tax is not related to for the purpose of business but merely as a consequence of a charge on the customer to have been collected in the capacity of withholding agent. We find no element of any commercial expediency involved in the presence of clause (v) of the S.R.O390(I)/2001, dated 18-6- 2001 which provides as under:- Clause (v): If the liability to charge, collect and pay the said amount shall be on the cellular company operator who shall deposit the same through a monthly tax return in terms of section 26 of the Sales Tax Act, 1990 and rules made thereunder."
19. The claiming of expenses on activation charges on its profit and gains would amount to set off debt which the law does not allow. Had it been the legislative intent, the clause (viii) of the aforesaid $.R.O. Would not have disentitled the cellular company operators to claim adjustment of input tax. The taxpayer could not bring on record any evidence of out of pocket payment of tax on activation charges. For the reasons explained above we are in full agreement with the arguments of the D.R./L.A and uphold the decision of the respondent No,2 to the extent of this ground. The appellate order on this score is set aside.
20. 5.2 Findings on Para 4.4.
21. We tend to agree with the learned D.R/L.A. That the respondent No,1 has mixed up- the issue of payment proof of federal excise duty and withholding tax and issue of expenses under free air time category. The respondent No,1 allowed its customers benefit of free extra time on standard rates, but did not report the revenue for the extra time nor paid excise duty in respect thereof. Therefore, such an extra time allowed as free air time does not qualify for a claim of expenses. The payment of federal excise duty and withholding tax being the liability of the customer and not that of the company would not entitle to appellant to claim expenses on collection of excise duty. Hence, the claim of expenses of Rs,357,132,000 by the respondent No,1 in respect of free air time allowed 'at certain rate is not within the scope of the subsection (1) of section 20 which provides as follows:-- Subsection (1) of section 20.---(1) Subject to this Ordinance in computing the income of a person chargeable to tax under the head "income from Business" for a tax year a deduction shall be allowed for any expenditure incurred by the person in the year wholly and exclusively for the purposes of his business... (unquote).
22. The respondent No,2 has rightly added back the same vide order dated 30-4-2009 as the appellant did not incur any expense on collection of excise duty paid by its customers. Accordingly, we affirm the decision of the respondent No,2 and vacate the order of the appellate authority in relation to this ground.
23. 5.3 Findings on Para 4.5.
24. ' The D.R/L.A. Argued that the payment made to P.T.C.L by the respondent No,1 is exempt in view of exemption certificate issued under section 153 of the Income Tax Ordinance, 2001. However, any specific exemption certificate issued in respect of National Telecommunication Corporation (NTC) is subject to withholding tax which requires to be added back. The case of Messrs NTC is not covered under section 49(3) of the Income Tax Ordinance, 2001 as being taxable entity having its N.T.N. No,1218153-6 filing income tax returns regularly. The respondent company has not furnished any exemption certificate under section 153 of the Ordinance ibid. Therefore, the payment of Rs,3, 863,891 made to NTC without deduction of withholding tax is without force of law. Hence the expenses claimed by the respondent No,1 under section 21(c) are held to be inadmissible. The respondent No,2 has rightly disallowed the expenses claimed by the respondent No,1 and added back the same in respect of payment made to NTC. The respondent No,2's order on this ground is also sustained. The appellant authority's order on this issue is set aside.
25. 5.4 Findings on Para 4.6.
26. ' The D.R/L. A. Argued that expenses on account of advertisement are of significance importance to earn recurring benefits for an indefinite period of time and for years to come. The D.R/L.A. Stated that no doubt it is difficult to retain customer's SIM indefinitely. The advertisement campaign is meant to retain existing customers and attract new customers through certain attractive packages and expenses for this purpose are of capital nature. There is no force in the taxpayer's company that benefits of advertisements beyond one year cannot be determined. In such a situation section 24(3) provides a correct answer as its recurring nature does not preclude it from the definition of intangibles. Section 24 (3) of the Income Tax Ordinance-2001 provides as under:- ' Section 24(3): "intangibles".... Subject to subsection (7), the amortization deduction of a person for a tax year shall be computed according to the following formula namely: ' Where........
(A) is the cost of intangible.
(B) is the normal useful life of the intangible in whole years.
27. An intangible...
(A) with a normal useful life of more than ten years or
(B) that does not have an ascertainable useful life. Shall be treated as if it had a normal useful life of ten years.
28. We have examined the view point of both the parties. No doubt expenditure on the advertisement campaign is a common feature of telecom industry and heavy amount is incurred to attract customers through various incentives and lucrative packages. We asked the respondent No,1 to determine a specific period of benefits in order to justify his expenses claimed. The respondent No,1 conceded that determination of the period of benefit for a particular campaign may or may not be for a period of one year or more. Accordingly a safe inference can easily be drawn that such expenses which are of recurring nature for an indefinite period and in case the useful life of an expense is not determinable would fall under section 24(3) as "intangibles" and such expense shall be amortized over a period of ten years. Therefore, the expense claimed by the company as aforesaid falls within the ambit of "intangibles" as the benefit beyond one year is not determinable.
29. In view of this discussion we believe that the respondent No,2 has rightly amortized the intangibles over a period of ten years by allowing an amortization of Rs,47,760,000 for the tax year 2006 out of Rs,477,663,000 claimed by the company and added back Rs,429,896,700 to the income of the company. The appellant has proved his stance to be valid and upheld the order dated 30-4-2009 passed by the respondent No,2 and vacate the order dated 15-7-2009 passed by the respondent No,3 on this issue.
30. 5.5 Findings on Para 4.7.
31. ' The D.R/L.A. Stated that the respondent No,1 has wrongly taken his case under Sections 22 and 23 of the Income Tax Ordinance, 2001 as "depreciable assets" instead of resorting to section 24(11) of the Ordinance ibid. Therefore, in order to ascertain whether the case of the respondent No,1 falls within the scope of "embedded software's" or "computer software's" it is imperative to explain definition of "computer software" as envisaged under section 24(11) of the Income Tax Ordinance, 2001.
32. ' Section 24 (11)...Intangible means a patent, invention, design or model, secret formula or process, copyright, trade mark, scientific or technical knowledge, computer software, motion picture film, export quotas, franchise, license, intellectual property or other like property or right or contractual rights and any expenditure that provides an advantage or benefit for a period of more than one year (other than expenditure incurred to acquire a depreciable asset or unimproved land)".
33. From the above definition this Tribunal is of the firm view that "computer software's" are intangibles.
34. We also take a careful review of the company's own declaration that the software's under discussion are their "fixed assets" and its claim of initial allowance and tax depreciation on the software's under head computer and accessories leaves no room for escape from the purview of section 24(11) of the Income Tax Ordinance, 2001. The software's whether embedded or computer software, their basic function performance of compact logical operation in accordance with pre- determined program to obtain desired results. Therefore, it is not proper to hold that software which cannot run on a computer could not be designated as computer software. Thus all software's whether system software's or application software's fully satisfy the definition of "intangibles" as contemplated under, 'section 24(11) of the Ordinance ibid. The supplier of these software's has given license to the taxpayer company for both hardware and software parts of the equipment supplied. It gives a similar and identical performance which is developed on a computer system. Therefore, all the software's which are capable of transmitting the data and voice are basically "computer software's". We have reviewed the company's audited accounts which indicate that embedded software's have separately been declared by the respondent No,1 in their audited accounts. The respondent No,1 has failed to determine the period for usage of these software's during the course of proceeding at initial stage, appellate forum and before this Tribunal. Therefore, we do not feel any hesitation to hold that the cost of such software's should have been amortized over a period of ten years as provided under section 24(3) of the Income Tax Ordinance, 2001. Since the stance of the respondent No,1 is not in conformity with the provisions of income tax law as discussed above, we would endorse the action of the respondent No,2 who has rightly disallowed initial allowance and tax depreciation of Rs,1,0332,200 and Rs,154,980. The order of respondent No,2's on this score is affirmed.
35. 5.6 Findings on paras 4.8. And 4.9.
36. The D.R/L.A. While concluding his arguments stated that in the absence of ascertaining correct tax liability and without verification, the minimum tax paid under section 113(2C) by the company against tax credits paid by the company cannot be accepted. The contention of the company that they have paid in excess needs verification as also ordered by the respondent No,3 vide his order dated 15-7-2009. Further it is yet to be ascertained that taxable profits, if any, are liable to be adjusted against future tax liability in order to adjust minimum tax paid in subsequent five years.
37. ' This tribunal agrees \fifth the finding of the First Appellate Authority on this issue, in which no final order has been passed, as yet. The determination of this issue is, therefore, left to the respondent No,2 after providing a personal opportunity of hearing to both the parties.
6. The appellant in this case has claimed deduction of certain expenses which are manifestly outside the scope of the law. A claim of tax exemptions has to be construed strictly in the context of the overlapping relevant statutory provisions. The claims of expenses and the resultant tax relief has to be tested on the touchstone of the criteria laid down by the Superior Courts. Some reported case law is reproduced as follows:-- ' Provisions granting exemptions or privileges have to be construed strictly [1993 PTD 306] against the person claiming the exemption or the privilege. It is for him to show that he is entitled to the exemption. If the rules do not refer to 'an item of capital there can be no exemption with regard to it. [PLD 1966 SC 828] Where an exemption from taxation is claimed, the words of the exempting clause must be strictly construed in favour of the State. It is based on the theory that the obligation to pay tax is co-extensive with the protection received by the subject and in obtaining an exemption from taxation the particular subject is seeking relief from the obligation at the cost of other assesses but when the words of the notification in its plain reading entitles to the exemption specified therein, the Court cannot go beyond the wordings of the clause to withhold that relief on the theory of equal obligation for equal protection, [PLD 1966 Dacca 523] grants of tax exemptions have to be narrowly construed against tax payer. [1998 PTD 3835]. Law as prevailing in the assessm ent year would apply. [1998 PTD (Trib.) 62]. If the language of the provision is doubtful, same should be resolved in favour of assessee on the touchstone of the intention of Legislature.
38. [2000 PTD 497]. All exemptions from taxation increase the burden on the other members of the community, they should be deprecated except to the extent permissible by the express language of the Statute, provisions granting exemptions or privileges have to be construed strictly against the person claiming exemption or privilege. The onus in this connection lies on the assessee claiming exemption to establish his plea. The exemption must be strictly construed and confined to the exemption itself and not extended beyond it [1973 PTD. 361]. Full effect is to be given to the provision creating exemption. Court cannot supply deficiency. [1998 PTD 3669]. The interpretation should aim at to preserve objective objection. [1998 PTD 930] ' Exemption provision in a taxing statute has to be construed strictly, [1993 PTD 306] and allowed in such case only where an assessee is able to establish that same is covered by exemption provision on all force. [2003 PTD 1805]. In matters of exemption and relief the law is to be construed liberally and the relief is not to be denied for technical irritants. [2003 PTD (Trib.) 1081] Recital of wrong source of power in opening part of notification would not affect validity of amendments made thereby. Expression or words in a notification must be read as such and not in any other way, unless the context requires that the latter course should be followed. [2002 SCMR 312]. Assessee has to prove himself to be within the four corners of the exemption provision. [2002 PTD (Trib.) 783].
39. Particular subject which does not specifically stands exempted, cannot brought into the category of exemption by stretching the rules which does not permit such interpretation. [1998 SCMR 1950].
40. Doubt or ambiguity, if any, is always to be resolved in favour of the subject and not in favour of the State. [1990 PTD (Trib.) 121] Where two interpretations are possible, one favorable to the assesses should be adopted. [1988 PTD (Trib.) 315]
7. In view of the above discussion, the departmental appeal succeeds and the order dated 30-4- 2009 passed by the respondent No,2 is sustained. The order dated 15-7-2009 passed by the respondent No,3 being devoid of merit is set aside to the extent of inconsistency with the findings entered vide this judgment.
8. This order consists of 9 pages each bears my seal and signature.