1. Through these five appeals the appellant Taxpayer has objected against the consolidated impugned order of the learned CIR(A) dated 24-4-2010 for the tax years 2004 to 2008 on the following common grounds:-- "(2) That the learned Appellate Commissioner Inland' revenue has, erred in law in holding that the Additional Commissioner was legally competent to amend the Order under section122(5A) of the Income Tax Ordinance, 2001 whereas the jurisdiction exercised by the Additional Commissioner and confirmed by the worthy Appellate Commissioner is without lawful authority-..And the Order has no lawful effect as the assumption of jurisdiction is the core issue in every case.
(3) That the worthy Appellate Commissioner Inland Revenue has further erred in holding that the Order made under section 120 of the Income Tax Ordinance, 2001 was erroneous as well as prejudicial to interest of revenue. These observations of the worthy Appellate Commissioner Inland Revenue are not based on the correct appraisal of acts and the applicable law.
(4) That the Worthy Appellate Commissioner Inland Revenue has erred in holding that the Appellant/Taxpayer 's receipts are not in the nature of "discount income", falling under normal tax regime (NTR) but the same are in the nature of "Commission" income, falling under presumptive tax regime (PTR) ignoring the fact that the Appellant/Taxpayer's receipts are "discount income", which are equated with "gross profit" representing the sale of newspapers and periodicals of the publisher company. Expenses are incurred against the gross profit and resultantly net profit is declared and returned for tax accordingly.
(5) That the worthy Appellate Commissioner Inland revenue has erred in law in holding that earning of fixed percentage on the sale of newspapers and periodicals is "Commission" and has totally ignored the nature of activities of the Appellant who is maintaining a huge setup of employees and other expenses under various heads are incurred for earning the "discount income" on sale of newspapers and periodicals.
(6) That the Appellant has employed sufficient capital and has debtors and creditors which are general practice in undertaking the trading activities, therefore, the income earned by the Appellant from "discount income" squarely falls under normal law. The worthy Appellate Commissioner's action on this score is also unlawful and not sustainable under the law.
(7) That the worthy Appellant Commissioner has further erred in law in not appreciating the distinction made by the legislature prescribing different rates of tax deduction on the commission, sales/supplies and the services rendered or provided. The lesser and higher rates of tax ranging from 3.5% to 10% have been demarcated by the legislature for different reasons and the intention of the legislature cannot be ignored
(8) That the appellant Commissioner Inland Revenue's observation that appellant's income earned on fixed percentage is commission income and fall under presumptive tax regime (PTR) and not under Normal Tax Regime (NTR) is unjustified, unlawful and devoid of any merit as the Appellant's activities from the sale of newspapers and periodicals fall under normal law and return of income under normal law has correctly been declared and assessed as such under section 120 of the Income Tax Ordinance, 2001.
(9) That the Appellant Commissioner Inland Revenue has ignored the fact that the receipts of the appellant have never been subjected to deduction of income tax under section 233 of the Income Tax Ordinance, 2001 therefore, the question of falling in the ambit of section 169 of the Income Tax Ordinance, 2001 does not arise in this case as the Appellant has paid advance tax under section 147 of the Income Tax Ordinance, 2001 for the year under consideration to meet the tax payment under section 137 of the Income Tax Ordinance, 2001. This pattern has been retained for the past and future assessm ent/tax year."
2. Brief facts giving rise to the filing of the titled appeals are that the Appellant, being a private limited company, has declared discount income from the sale of newspapers and periodicals name? Daily DAWN Karachi, Lahore and Islamabad editions published by Messrs Pakistan Herald Publications (Pvt.) Limited. The Additional Commissioner has treated the deemed Assessment Orders finalized under section 120 of the Income Tax Ordinance, 2001 as erroneous and prejudicial to the interest of revenue on the plea that the Appellant has declared its receipts as "commission" for eleven years (from 1990-1991 to 2000-2001) and declared same receipts as "discount" since 2001-2002 and onward to stay out of Presumptive Tax Regime. According to the Additional Commissioner this is classic example of change of opinion. By the taxpayer and concluding that the deemed Assessm ent Orders issued under section 120 of the Income Tax Ordinance, 2001 are erroneous as well as prejudicial to the interest of revenue, has treated the "discount income" as "commission income" and has re-computed the income for all the tax years 2004 to 2008.
2. Being aggrieved with the above treatment, the appellant has filed first appeals before the learned CIR(A), who confirmed the treatment of the Additional Commissioner for the years under reference, hence these appeals.
3. Mr. Muhammad Aleem, Advocate has appeared on behalf of the appellant while nobody appeared from the respondent department in spite of the fact that proper notice of hearing has been served.
3. The learned counsel has argued that all the grounds are related to the matter of converting the "discount income" which is otherwise chargeable under the normal provisions of the Ordinance into "commissioner income" which is chargeable under the Final Tax Regime. Elaborating his arguments, he has submitted, that the Appellant has correctly declared "discount income" on account of sale of newspapers and periodicals namely daily DAWN Karachi, Lahore and Islamabad editions published by Messrs Pakistan Herald Publications (Pvt.) Limited. According to learned AR, this source of income has remained the same from the inception of the business activities of the Company. Merely using the word "commission" does not mean that the appellant was earning income from commission in the past. This was merely misnomer and realizing this fact, the correct accounting terminology was adopted and used. Even the external auditors of the taxpayer have also endorsed the word of "discount income", being a proper accounting terminology which illustrates a true picture of the affairs of the appellant.
4. He has contended that the newspapers and periodicals published by Messrs Pakistan Herald Publications (Pvt.) Limited are supplied to the end consumers/readers either through the hawkers or by the taxpayer enjoying the status of private limited company. The price is fixed for the end users i.e. Readers of the newspapers and periodicals. This distribution made by the appellant is reported to the publisher of the newspapers and periodicals and the appellant has assigned a sizeable team whose main job is to sell the newspapers and periodicals to the end users/readers.
5. Recovery is also made by this team of the taxpayer. The taxpayer retains its discount and the net amount is paid to the publisher.
6. It is argued that the Circulation Bills are issued by the publisher namely Messrs Pakistan Herald Publications (Pvt.) Limited mentioning the relevant particulars such as Bill No., date, name and address of Home Delivery Services (Pvt.) Limited/the appellant, in which the number of copies and the sale price for the reader and the amount of discount is mentioned. The supplied newspapers and periodicals are sold by the appellant and the gross amount is recovered from the reader, therefore, this mode and manner of transaction clearly demonstrate that undoubtedly it is in the nature of discount income.
7. He has in this regard referred and relied upon the following dictionaries in which the word "discount" has been defined.
8. Black's Law Dictionary:-
(1) A reduction from the full amount or value of something esp. a price
(2) A supplier's price discount based on the purchaser's relative distance from the supplier in the chain of distribution. For example, a wholesaler or distributor usu. Receives a greater discount than a retailer.
9. Trade discount.
1. A discount from list price offered to all customers of a given type-for example, a discount offered by a lumber dealer to building contractor.
2. The difference between a seller's list price and the price at which the dealer actually sell goods to the trade.
10. Oxford Dictionary-:
1. A deduction from a bill or amount due, given esp. In consideration of prompt or advance payment or to a special class of buyers.
2. A deduction from the amount of a bill of etc. By a person who gives value for it before it is due 3. The act or an instance of discounting, deduct (esp. An amount from a bill etc.), reduce in price, give or get the present worth of (a bill not yet due), below the nominal or usual price (cf. Premidm), not in demand, depreciated.
11. "Trade discount.---A discount given to the distributor is as much a trade discount as the discount given to the dealers. No legal distinction can be made between the two discounts, the one given to the distributor and the other to the dealer. Both the discounts are trade discounts within the meaning of section 4 of the Central Excise and Salt Act Pakistan v. P. Tobacco Co. PLD 1961 SC 66; PLR 1959 (2) 1050.
12. The learned AR has argued that the appellant, being a private limited company, has sizeable team, which stays, in the field for the sale of newspapers and periodicals and to make recoveries for the same. Against the discount income various expenses under different heads have been incurred and the resultant net income is offered for taxation.
13. He has contended that in the case of appellant only commission income is involved, no elaborate set up involving expenses is incurred or required. Therefore, the legislature has burdened higher percentage of final taxation @ 10% on the gross receipts/commission. Brokers and commission agents work as middlemen, they merely become instrumental in passing the commodity from one hand to another hand without incurring substantial expenses. Where services are rendered or provided, the rate of taxation has been fixed @ 6% as the professional services require some kind of expenses and specialized expertise. The sales arising from manufacturing or trading require higher amount of expenses by employing machinery, stock, staff and other operational expenses, therefore, the legislature has fixed the rate of final taxation @ 3.5%. This has been done by the legislature keeping in view all the circumstances of each category of the taxpayer.
14. He has contended that in earlier years, the taxpayer recorded the revenue as "commission income", but subsequently realizing the fact that the activities of the taxpayer do not fall under the ambit of "commission", the mistake was rectified by describing the correct words of "discount income".
15. The discount income or gross profit/income from the sale of newspapers and periodicals supplied by/purchased from Messrs Pakistan Herald Publications (Pvt.) Limited is recorded in the following manner in the tax year 2004.
16. Sales Rs.39,431,977 Less: Cost of Sales Rs.27,602,384 Discount income/Gross profit/income Rs.11,829,593 Similar method of accounting has been maintained in terms of section 32 of the Income Tax Ordinance, 2001 since the inception of business activities till tax year 2008 and presently the same method is being adopted by the taxpayer for the subsequent tax years. The learned AR also filed the copies of the returns of income filed in the earlier years and the statement of accounts emphasizing the fact that the appellant has remained in the same line of business and merely words commission was used earlier and later proper terminology was used by writing as "discount income"
17. The learned counsel has also elaborated the distinction between "commission income" and "discount income" and stated that the brokerage/commission agents who are having offices at Jodia Bazar and the various fruits and vegetable markets/mandis who can be termed as earning "commission income" sitting in a sma ll office using only a table, telephone and personal contacts.
18. They do not have huge set up except skeleton staff. The real estate is also purchased and sold through brokers having only small offices, telephone and few staff members who are acquainted with real estate business. Sugar mills usually sell the sugar through brokers.
19. On the basis of these facts learned counsel is of the view that the generation of commission/brokerage income needs small scale activities whereas the process to earning "discount/trade discount" needs lot of activities through payroll and operational overheads which is precisely the business model of the appellant as demonstrated above and making it eligible to fall under normal tax law. Therefore, the appellant correctly and lawfully filed the returns of income under normal law for all the concerned tax years.
20. The learned AR also referred the case decided by the Honorable High Court of Lahore in its judgment reported as (2005) 92 TAX 39 deciding the identical issue. The relevant findings are/extracted here in below:-- "The form in which part of the commission was ceded certainly means selling of air-tickets at rate lower than the one on which the assessee was allowed by its principal airlines to sell the tickets.
21. Therefore, the contention that at best the ceding of a part of commission was discount both in case of walk in passengers as well sub-agents bears weight."
22. The learned AR has requested to follow the above case-law as the ratio decidendi is fully applicable in the instant case.
23. He has also produced the copies of balance sheets of various tax years in which amounts receivable from hawkers have been shown "Trade debtors" and amounts payable to Messrs Pakistan Herald Publications (Pvt.) Limited have duly been shown as "Due to associated company', which confirm the act of trading activity between the two parties.
24. He is of the view that no tax has been deducted in this case, rather income tax has been paid in advance under section 147 of the Income Tax Ordinance, 2001. He referred to a chart in which it was shown that the appellant has paid income tax in advance under section 147 of the Income Tax Ordinance, 2001. He has contended that the income can be covered under section 169 of the Income Tax Ordinance, 2001 where tax has been deducted by the payer. The relevant provision of law in this respect is reproduced here in below:-- "169. Tax collected or deducted as final tax. (1) This section shall apply where - (a)- .................................................... (b) the deduction of tax is a final tax ............................... Or subsection (3) of section 233 on the income from which it has been deducted."
25. Learned AR has contended that in this case tax has not been deducted, therefore, the PTR provisions cannot be applied in this case.
26. He has also rebutted the findings of the Appellate Commissioner in which it was held that fixed percentage tantamount to commission. According to learned Counsel in the cases of sugar manufacturers, grain sellers, persons engaged in the Jodia Bazar for such transactions and real estate agents engaged in real estate business fix amount is not charged, rather their commission varies on the transaction and the circumstances of each case. He has therefore, requested to restore the original assessm ent/deemed order to have been completed under section 120 of the Income Tax Ordinance, 2001 and cancel the orders made by the Additional Commissioner under section 122(5A) of the Income Tax Ordinance, 2001.
4. We have heard the learned representative of the appellant and have perused the consolidated impugned order of the learned CIR(A), the available record of the case, the relevant provision of law and the case law referred by the learned counsel of the appellant. Nobody responded from the Department in spite of proper service of notice. We have noted that the Additional Commissioner in his orders from tax years 2004 to 2008 has.Observed that tax payer has declared receipts as commission for the last 11 years (from 1990-1991 to 200-2001) and started claim his receipts as discount since 2001-2002 to tax year 2008. He has further observed that the case of the taxpayer is a classic example of change of opinion, which cannot be accepted and the taxpayer has failed to produce any material to support the change in the nature and nomenclature of the business transactions. Due to post practice spanning over years the contention of the taxpayer was found devoid of any merit and since the taxpayer had no history, therefore, all the assessments deemed to have been made under section 120 of the Income Tax Ordinance, 2001 were considered erroneous in so far prejudicial to interet or revenue, the "discount income" was converted to "commission income" covered under PTR for all the five years under view.
27. The appellant filed first appeal but the learned CIR(A) has also confirmed the treatment meted out by the Additional Commissioner holding that the price is fixed for end users i.e. Readers of the newspapers and periodicals and the appellant retains its commission at fixed rate and thereafter the net amount is passed on to the publisher. The learned CIR(A) has concluded the matter as under:- "Under the attending circumstances and considering the above factual as well legal position, I hold that appellant's income earned on fixed percentage constitute commission income and fall under the Presumptive Tax Regime (PTR) and not under Normal Tax Regime (NTR) irrespective of change in the accounting terminology. Therefore, the orders amended under section 122(5A) of the Income Tax Ordinance, 2001 for the tax years 2004 to 2008 are based on valid grounds and found well within the purview of law, calls for no interference, hence are maintained."
28. We have given due consideration to the arguments of the learned AR and the record available before us. We are of the view that the nature of business i.e. "discount income" from sales of newspapers and periodicals undertaken by the appellant falls under the NTR and not PTR for the reasons that there has been purchase and sale of newspapers and periodicals published by Messrs PHPL for which a large infrastructure and manpower has been employed by the appellant.
29. The nature of business which commission income is involved does need such activities and for that reason the deduction of income tax has been prescribed @ 10% instead of 6% for services rendered and 3.5% for sale and supplies. The intention of the legislature prescribing different rates for different categories can not be ignored.
30. We are further of the view that no deduction of income tax is involved in this case, rather the appellant has paid the advance tax under section 147 of the Income tax Ordinance, 2001 against the future income of the respective tax year and since no deduction of income tax has effected by the payer in this case, therefore, the provisions contained in section 169 of the Income Tax Ordinance, 2001 are not attracted in this case.
31. The learned AR of the appellant has shown during the course of arguments the copies of assessm ent orders and the final accounts of various assessment/tax years in which the word "commission" was written and which was subsequently changed to "discount income" and duly endorsed by the external auditors of the taxpayer.
32. Regarding the fix parentage we find force in the contention of the learned AR, that this cannot be made the sole ground for treating the normal business activities into presumptive activities as there are other instances of commission income involved in the sale/purchase of sugar, grain and other commodities exchanged/sold through the commission agents who do no earn commission on a fixed basis, rather the rate is variable, negotiable and arguable. The agents of real estate also do not earn a fixed commission it is mutually decided with the parties involved in selling or buying the properties.
33. The learned counsel has referred the decision of this Tribunal reported as 2010 PTD (Trib.) 1209 which is regarding, the Franchise of the Pakistan Mobile Communication Ltd., but the issue to be resolved in that case was also same as is in the instance case. The tribunal in that case after considering the agreement of Franchise according to which the taxpayer in that case could also appoint sub-dealer for the business after approval and permission of PMC, and copies of invoices raised to PMCL showing that the nature of receipts are services rather than commission, which reveal that the taxpayer is generating revenue line rent, retention, up-gradation, international rooming etc, and all these transactions are out of the purview of the definition of commission as revenue in this regard has not been generated from the sale of goods but by providing services, has finally held that the transactions of the assessee fall out of the definition of commission.
34. After considering the factual as well as legal aspect of this case, we are of the view that the transaction of the appellant falls under normal tax regime (NTR) and not under presumptive tax regime (PTR). The orders deemed to have been made under section 120 of the Income Tax Ordinance, 2001 are found neither erroneous nor prejudicial to the interest of revenue. The impugned Appellate Order of the learned CIR(A) confirming the observation of the Additional Commissioner is therefore, vacated and the original orders for all the five years are restored. As a matter of academic importance, the fact remains that without vacating the proceedings initiated for the tax year 2006 under section 177 of the Income Tax Ordinance, 2001 initiating the proceedings under section 122(5A) of the Income Tax Ordinance, 2001 are not lawful, rather are void and without lawful effect.
35. All the Five orders for the Tax Years 2004 to 2008 passed under section 122(5A) are cancelled.
36. All the Five appeals filed by the Taxpayer are allowed.
37. C . M . A. /100/Tax(Trib . ) .