TARIQ SALEEM SHEIKH, J.Through this consolidated judgment we shall decide ITA No. 181/1998, ITA No. 189/1998, ITA No. 190/1998 and ITA No. 191/1998 as a common thread weaves through them.
2. The above-mentioned ITAs are directed against Order dated 13.03.1998 passed by the Income Tax Appellate Tribunal, Lahore (the "Appellate Tribunal"), and it is urged that the following question of law arise out of it that require determination by this Court:--- '(a) Whether 'on the facts anti in the circumstances of the case the Income Tax Appellate Tribunal has misdirected itself in treating the assessee as a manufacturer on mere issuance of an exemption certificate under Section 50(4) which was issued contrary to law and procedure?
(b) Whether mere issuance of an exemption certificate can be made basis of declaring an assessee a manufacturer, particularly when under clause (xvii) of SRO No. 586(1)/91, dated 30.06.1991 the said certificate can be issued to non-manufacturer as well and when the assessm ent of the assessee having been cancelled on the very issue of being manufacturer or otherwise?
(c) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that provisions of Section 143 read with Section 80-C are not applicable?
3. The background of the afore-mentioned ITAs is that the Respondent No. 1 is a private company limited by shares. It derives income from manufacturing and supply of machinery to its clients in Pakistan and abroad. It filed its tax returns for the relevant Assessment Years and the assessment was finalized under Section 62 of the repealed Income Tax Ordinance, 1979 (the "Repealed Ordinance"). Subsequently, the Inspecting Additional Commissioner (IAC) called for the record and after examining the same found that the Respondent's business activity mainly consisted of execution of contracts involving fabrication, execution, installation and civil works. As such, it was obliged to file statement under Section 143B and consequently its tax liability was determinable under Section 80C. All its receipts attracted provisions of Section 50(4), 50(5) and 50(7B) were in terms of Section 80C(1) of the Repealed Ordinance and thus determination of income by the Assessing Officer on such receipts in terms of Section 62 was erroneous and Prejudicial to the interest of revenue. Resultantly, the IAC invoked Section 66-A and modified the assessment treating the Respondent as a contractor. The Respondent preferred an appeal before the Appellate Tribunal against the IAC's order which was accepted. The Appellate Tribunal, vide Order Dated 13.03.1998 cancelled the order passed under section 66A and restored the original assessment order holding that the Respondent was a manufacturer and not a contractor and sections 143 B and 80C were not attracted.
4. The main argument of the Development here is that the Respondent is an engineering company which manufactures highly sophisticated machinery under a contract and barring a few exceptions also carries out civil mechanical and electric works (including desingning) for its installation at site and that too is a part of the contract. Therefore even the receipt from these works are part of the actual contract entered upon with the local and foreign clients and thus fall within the ambit of section 80C.
5. On the other hand the learned Counsel for the Respondent contends that the Respondent is a manufacturer and supplies working plants at its clients site, which involves manufacturing fabrications assembly transportation imports purchases etc. The Department has itself admitted that it is engaged in supply of goods while issuing exemption certificates under Section 50(4) from time to time. He further contends that the Respondent has opted out of the presumptive regime under clause (9) of Part-IV of the Second Schedule of the Repealed Ordinance. From the Issuance of the afore-said exemption certificates it is evident that the departmental officers never had any doubt that the Respondent's receipts or supplies were duly covered under Clause (9), ibid. The assessm ent cannot be reopened merely on the basis of change of opinion.
6. Section 80C of the Reopened Ordinance imposed tax on the income of certain contractors. Sub- section (1) and (2) of Section 80 C provided that, in the case of the resident person, where the amount representing payments on which tax is deductible under section 50 (4) [other than payments on accounts of services rendered] is received or accrues the whole of such amount shall be deemed to be the income of that Person and tax would be charged thereon at the rate specified in the First Schedule. Sub-section (4) of Section 80C made a further stipulation that where the assessee had no income other than that in respect of which tax had been deducted or collected as aforesaid, the same would be the final discharge of his liability.
7. Section 50(4) to which Section 80C made a reference ordained that advance tax at source shall be deducted in accordance with the First Schedule on the payments made on account of:---
(i) the supply of goods; (ii)'services rendered; (iii)execution of a contract with the government, or a local authority, or a company, or a registered firm or any foreign consultant or consortium.
8. However, Clause (9) of Part-IV of the Second Schedule provided an exception to the above- mentioned provisions. It said:--
(9) The provisions of Section 80-C insofar as they relate to payments on account of the supply of goods on which tax is deductible under sub-section (4) of Section 50 shall not apply in respect of any person, being a manufacturer of such goods, who opts out of the presumptive tax regime: Provided that a declaration of final and irrevocable option is furnished in writing along with the return of total income under Section 55: Provided further that nothing contained in this clause shall apply to any manufacturer of goods for which special rates of deduction of tax are specified under clause (c), sub-section (4) of Section 50.
9. The Respondent is engaged in two types of activities. First, supply of machinery through a contract or otherwise, and secondly, supply of working plant at the client's site which involves not only manufacturing but also installation, that includes civil, mechanical and electric works. The first activity, would be classified as a supply contract while the second would not. Circular No. 11 of 1991 issued by the Central Board of Revenue while explaining the amendments brought about in Section 50(4) of the Repealed Ordinance by the Finance Act, 1991, adumbrated to this distinction as follows:--- "6.Nature of supplies, service and contracts.--The nature of supply of goods, services rendered and execution of contracts are explained as under:--- "(i)Supply of goods.-- This includes supply of goods whether through a contract or otherwise and on cash or credit basis ....
"(ii) Services rendered.-- Contracts.-- This includes all types of contracts including civil, mechanical and electric works, labour contracts and carriage contracts, etc. but does not include contracts for supply of goods and services rendered which have been separately provided for in sub-section (4), 10.In an earlier Circular (Circular No. 4 of 1981, dated 17.02.1981), the Board issued a clarification which also supports the above distinction. The clarification denied--- Clarification has been sought by various quarters regarding the rate of deduction of tax at source under sub-section (4) of Section 50 applicable to the "supplies of goods made under a contract."
The issue has been examined at length and the Board is of the view that the supplies, even if made in pursuance of a contract, remain supplies and do not fall within the ambit of "execution of a contract." Thus the payments made in lieu of such supplies of goods shall attract the rate of deduction of 2% presently applicable to supplies of goods.
11. The Respondent had opted out of the presumptive tax regime under Clause (9), ibid on the ground that it was a manufacturer and was engaged in the supply of goods. It had also obtained exemption certificates under Section 50(4) from different Commissioners of Income Tax from time to time. As Already observed since the Respondent is engaged in the supply of goods as also the execution of contractor the exemption would apply to the former and not to the latter.
12. For the above reasons, we set aside the impugned order dated 13.3.1998 and remand the matter to the Assessing Officer who shall re-determine the tax liability of the Respondent keeping in view the distinction between the two types of business activities being carried out by it. This factual inquiry shall be undertaken by the Appellate Tribunal to arrive at a just conclusion. Since this is an old matter , the appeal, on demand, shall be decided within two months by the Appellate Tribunal.
13. Office shall send a copy of this judgment to the Appellate Tribunal Inland Revenue under the Seal of this Court as per law.