Justice Nadeem Azhar Siddiqi: This appeal has been filed by the appellant challenging the Order-in-Appeal No.33/2014 dated 31.03.2014 passed by the Commissioner (Appeals) in Appeal NO. 54/2013 filed by the Appellant against the Order in Original No. 235/2013 dated 07.10.2013 passed by the Assistant Commissioner (Ms. Ambreen Fatima) SRB, Karachi.
01.The facts of the case as mentioned in the Order-In-Original are that the Appellant is engaged in providing and rendering the taxable services of Courier falling in the category of Courier, Tariff Heading 9808.0000 of the schedule of the Sindh Sales Tax on Service Act, 2011 (herein after referred as the Act) which are chargeable to sales tax under section 3 of the Act at the rate of 16%.
02. It was alleged in the Order-in-Original that during scrutiny of the Financial Statement for the year ended December, 2011 and the sales tax returns filed by the appellant with SRB and FBR revealed that the appellant declared services of Rs.4,737,617,000/= in their Financial Statement for the year ended December, 2011 whereas, they have only declared Rs.402,447,326/= against the output as evident from the sales tax returns filed with FBR and SRB. It was further alleged that the appellant declared short output tax of Rs.713,169,674/= which involves sales tax of Rs.117,672,995/=.
03. 1t was also alleged in the order in original that the appellant has received Network services from foreign service provider and made payment of Rs.2,726,842,000/= thereon under the agreement. It was alleged that the said payment is covered under the definition of Franchise falling under Tariff Heading 9823.0000 of the 2 Schedule of the Act and involves sales tax of Rs.272,684,200/=. It was also alleged that the appellant has declared exempt services for the tax periods July 2011 to December,2011 in the sum of Rs.3,627,013/= involving sales tax amounting to Rs.580,322/=.nd
04. That a show-cause notice dated 12.03.2013 was served upon the appellant to explain as to why tax liabilities (as mentioned above) may not be assessed and determined under section 23 read with sub-section (1A) (a) of section 47 of the Act in addition to the liability of default surcharge under section 44 of the Act and penalties under serial No. 3, 6 (d), 1 1, 12 1nd 13 of the Table of Section 43 of the Act should not be imposed.
05. The appellant filed its reply dated 12.04.2013. In the reply it has been stated that i) the gross value of revenue of Rs.4,737,617,000/= includes sales tax of Rs.657,067,457/= and demand of sales tax upon revenue which already include amount of sales tax is baseless. ii) the storage services are covered under 1 Schedule of the Act but are not covered under 1 Schedule of the Act and are exempt from payment of sales tax. iii) other income in fact a discount earned by the company from air lines and not a consideration of service and not exposed to sales tax. iv) the company is engaged in the business of international courier services for documents and parcels. The operation of the company inter-alia comprised of international delivery of documents and parcel to and from Pakistan. To deliver the documents and parcels aboard, company requires the international network of transportation and for successful execution of transportation, company avails network services from DHL International GmbH ( successor of DHL Operations B.V. (DHLI) and the company is wholly owned subsidiary of Deutsche Post International B.V. Netherland. The DHLI is providing transportation services through its network to the company and as a consideration for the same, company is required to pay DHLI the Network Fee.
06.The Assessing Officer has passed Order-in-Original and levied tax on account of short declaration of sales tax in the sum of Rs.188,424/= & Rs.4,200,800/= (storage service) and sales tax on Franchise Services in the sum of Rs.272,684,200/= and imposed default surcharge (to be calculated at the time of actual payment) and penalties in the sum of Rs.30,478,656/= under serial No. 3, 1 1 and 12 of Table of section 43 of the Act.
07.The said order of the Assessing Officer was challenged by appellant by way of filing appeal before the Commissioner (Appeals), who has uphold the order in original and confirmed the default surcharge and penalties imposed by the Assessing Officer and dismissed the appeal, hence this appeal.
08. Mr.Saqib Masood the learned Representative of appellant apart from filing written synopsis raised the following pleas:
(i) (a) Network Fee (NWF). He submits that the amount remitted from Pakistan by DHLP to DHLI amounting to Rs.2,726,842,000/- was for the whole year of 2011 from January to December 2011 was not on account of Franchise Fee but on account of various services including transport services rendered by DHLI to DHLP outside Pakistan . He then referred to the definiti on of Franchise provided in rule 2 (1) (ix) of SST Rules and submits that NWF cannot be taxed as Franchise Fee (FF) as rule does not provides Network Fee. He then submits that even Income Tax Department is not treating the said amount as Franchise Fee but as business expenses for DHLP and business income for DHLI. He then submits that the Franchise service is also taxable under FED Act, 2005, but FBR never raised the demand and the appellant never pays FED. He then submits that the definition of Franchise and rule 36 of Rules, 2011 was borrowed from FED Act, 2005 and FED Rules. He then referred to the un-reported case of Kerala High Court (India) in C.E. Appeal No. 21 of 2009 (M/s Speed and Safe Courier Service versus Commissioner) and submits that the principles relating to franchise have been decided in this case. b) He then submits that before 11.07.2013 when the definition of Franchise was inserted by way of sub-section (46) of section 2 of the Act the SRB has no explicit authority to deem that payment remitted outside Pakistan was on account of payment of franchise fee. He then submits that unless the department established that Franchise Fee was remitted the tax cannot be levied and in this case the department failed to prove that franchise fee has been paid and the Networking Fee paid to DHLI has been wrongly considered as Franchise Fee. c) He then submits that in case the Tribunal consider that franchise fee has been paid there should be a fair value of franchise service upon which the tax is payable and for that the Tribunal may consider the restriction of not remitting more than 5% of the net sales as provided by State Bank of Pakistan in Foreign Exchange Manual (FEM) and the method of valuation of franchise fee provided in provisos to Rule 36 of the Rules, 201 1. d) In alternate Mr. Saqib submits that NWF pertaining to other provinces cannot be taxed in Sindh under SST Act.
He submits that if NWF or any part thereof is treated as Franchise Fee (FF) the same is not payable in full in Sindh, since the DHLP is operating across Pakistan and providing services to customers by using the name of DHL. Hee st then submits that the sales tax on alleged FF is payable in all provinces and Islamabad Capital on proportionate basis.
(ii) Double Taxation. He submits that courier services are subject to Sales Tax and the DHLP is collecting and depositing the tax on said courier services in the respective provinces. He then submits that whenever a customer/client avail the services from DHLP he pays tax to DHLP , which tax is to be deposited with SRB. The amount so received from the client/custo mer is subject to tax on courier service and from the same amount a portion was remitted to DHLI and in this way this is a double taxation not permissible under law .
(iii) Foreign Exchange Manual (FEM): He submits that FEM provides guide line for payment of franchise fees upto 5% of the net sales (excluding sales tax) and the State Bank of Pakistan did not allow remittance of Franchise Fee of more than 5% of the net sales excluding sales tax and refer to clause (ii) of Para 10 of Chapter XIV of the Foreign Exchange Manual. He then submits that whatever amount was remitted by DHLP to DHLI was with the approval/knowledge of State Bank of Pakistan and they have also not raised the point that the amount Includes element of Franchise. iv) Tax was wrongly levied from January , 2011 to June 2011: He submits that from the total tax levied on Network Fee of Rs.2,726,842,000/-an amount Rs.1,417,682,695/- pertains to network fees relating to the period January , 2011 to June, 2011. He then submits that the sales tax was levied from 1 July, 2011 and tax cannot be levied and collected from 1 January , 201 1.
(v) Storage Services: He submits that the storage services provided was not taxable at the relevant tax periods.
The service is part of 1 Schedule and not of 2 Schedule and cannot be taxed invoking other Tariff headings. He then submits that the tax was levied invoking Rule 40-A which pertains to service s provided by Airport Operators and Airport Terminal Operators and not by courier services provider .
(vi) Penalty & Default Surcharge: He referred to his written submission in this regard and submits that unless mensrea & malafides are established the penalty and default surcharge cannot be imposed. He relied upon the reported case of Honorable Supreme Court in the case of D.G. Khan Cement Co. Ltd. versus Federation of Pakistan (2004) 90 Tax I (S.C.Pak.).
(vii) Mr. Saqib Masood in alternate submits that Rule 36 of SST Rules 2011, and submits that rule (i) provides that the assessable value for the purpose of levy of 10% sales tax shall be the gross amount remitted or paid to the franchiser or the amount laid down in the franchise agreement. He then submits rule 36 was amended vide Notification dated 31' January, 2013 and provisos to rule were added to the said rule and proviso 2 to the rule provides that in case there is no franchise agreement an amount equal to 10% of the turnover of services of the franchise for which the tax is payable.. He then referred to Amended of Rule 36 effective from July, 2015 and referred to proviso to sub-rule 1 and subm its that that since there is no proper agreement of payment of franchise fee proviso No. 1 to rule 36 will apply in this case. He then submits that in Rule 36 provisos were added, which are beneficial and clarifactory in nature and can be applied retrospectively for the benefit of tax payer . He then submits that the show-cause notice was issued on 12.03.2013 for assessment of tax for the periods from July, 2011 to December , 2011 and Rule 36 was amended on 31.01.2013 and 01.07.2015 and the amended Rules are applicable as on the date of all amendments the proceedings were pending before the Assessment Officer and the assessment should be made on that basis.
(viii) He then submits that Tariff heading 9823.0000 provides tax on franchise services and not on Networking Fee and the entire amount remitted by DHLP to DHLI cannot be treated as consideration for receiving franchise services. He then submits that the amount remitted by DHLP to DHLI was against the services which DHLI provides/rendered to DHLP outside Pakistan and the same includes transportation and various other services provided by DHLI to DHLP . He raised a question whether the entire amount remitted by DHLP to DHLI is Franchise Fee or only a fraction thereof. He referred to un-reported case of Kurdistan Trading Company v/s Commissioner Inland Revenue. He also referred to the reported case of CH v/s Chanda Motors (1992) 66 Tax 132 (S.C. Pak).
09. Mr. Sohail Ahmed the learned DC for the Respondent submits that the Network Fee (NWF) remitted by DHLP abroad includes the element of Franchise Fees. Again says that the entire amount remitted by DHLP to DHLI was in respect of franchise fees. Mr. Kalhoro states that the amount remitted by DHLP to DHLI is covered under thest st st nd definition "Franchise Services". He then submits that the assessment was finalized on the basis of available record as the appellant has not provided the documents asked for. He then submits that at the assessment stage neither the agreement between DHLP and Deutsche Post International was provided nor the ledgers were produced in support of the contention that the entire amount remitted is on account of Network Fee and not Franchise Fee. He placed on record photocopy of first page of S. No.48/2015, 460/15 and 975/16 and submits that in the Plaints the appellant submits that no element of franchise fee (FF) is involved. He referred to agreement between DHLI & DHLP and submits that clause '(A)' of the Agreement is clear in respect of service of franchise provided by DHLI to DHLP. He then referred to clause) '(C)' of the Agreement and submits that the DHLI has allowed DHLP to access the Network and Operate in the territory (Pakistan) in accordance with the established practice of Network and DHLP has agreed to provide relevant services. He then referred to clause 2.2 (a) (b) and (c) of the agreement and submits that the DHLP agreed to comply with all international and local laws. He further referred to clause 3.1, (b) & (d) of the Agreement and submits that DHLI allows DHLP to access its Network and this permission is franchise. Mr. Sohail then referred to clause 4.1 of the Agreement and submits that the DHLP is receiving a sum equivalent to 7% of the total amount generated from operation in Pakistan. He then referred to clause 5.4 of the agreement and submits that in case of termination of agreement the DHLP cannot use the name of DHLI and its network. He then refer to clause 6.1 and 6.2 of the agreement submits that there is no relationship of partnership or joint venture between DHLI & DHLP and the only relationship is of franchiser and franchisee. Mr. Sohail placed on record the print out downloaded from the website of DHLI to show that the DHLP is using the name, goodwill and network of DHLI to carryon its business activities in Pakistan. Mr. Sohail tried to justify the levy of sales tax on storage services and submits that the same was rightly imposed. Mr. Sohail further submits that the default surcharge and penalties were properly imposed as the appellant has failed to discharge its statutory obligations.
10. Mr. Saqib Masood in rebuttal states that in the opening remarks the learned DC acknowledges that the Network Fees includes element of franchise. Mr. Saqib states that from perusal of the clauses of Agreement referred to by learned DC it is not reflected that the DHLI has provided any franchise services to DHLP . He then submits that the companies operating in Pakistan and using the name of parent companies for sale of goods or providing services are not required to pay separately on account of franchise services/using the name of parent company . In some cases the local companies are paying franchise fee under a separate agreement and in this case there is no separate agreement. He referred to clause 3.1 (d) of the Agreement and also referred to the definition of Franchise available in Rule 2 (1) (ix) of the Rules, 2011 and submits that for the year 2011 & 2012 the law mandated that there should be an agreement of franchise between the parties. He then submits that this argument of his is supported by subsequent amendment in Rule 36, which provides that wher e this is no agreement the basis of determination of franchise fees is 10% of the total sales. The SRB cannot challenged or dispute the mechanism of determination of Income between two parties and this is the mandate of Income Tax Department and the same has been accepted by the said department. The department at the stage of assessment has not considered that the entire network fees was not franchise fee and may be in the entire networking fees there may be an element of franchise which was not determined and entire network fee was taken as franchise fee for the purpose of levying sales tax on service of franchise.
11. The appellant filed suits before the Honorable High Court of Sindh. The appellant filed statement dated 15.03.2017 to the effect that it has no objection on proceeding and decision in this appeal.W e have heard the learned representative of the parties and perused the record made available before us.
12. The basic dispute appears whether there exist relationship of franchiser and franchisee between the DHLI and DHLP and whether the amount remitted by DHLP to DHLI is of Network Fee (as claimed by the appellant) or Franchise Fee (as claimed by the respondent). It is not disputed that an amount of Rs. Rs.2,726,842,000/-was remitted by appellant (DHLP) to DHLI. In the agreement between the DHLP and DHLI the word franchise fee has not been used instead the word "network fee" was used. Clause 4.1 of the Agreement provides for payment of "Network Fee" and its mechanism. It is not disputed that the appellant is using the name of DHLI and its network in connection with its business activities and operation in Pakistan. In the definition clause of the Agreement "Network" is defined as "shall mean the international transportation network around the world carrying on business under the style of name "DHL" who offer to their customers an international document and parcel delivery system and provide pick-up and delivery facilities similar to describe herein". From this clause of Agreement it is clear that the DHLP is using the name and network of DHLI for its operation in Pakistan in terms of Agreement. Sub-clause (d) of clause 2.2 provides that DHLP shall utilize identifying characteristics of the Network in substantially the same combination arrangement and manner as developed and displayed by the Network so that the Company's (DHLP) business will be readily recognizable by customers or potential customers as having access to network. Sub-clause (d) of clause 3.1 provides that as evidence of the Company's (DHLP) access to the network to process the inclusion of the name and address and telephone number of the Company (DHLP) in the Network's Worldwide Express Directory and details of the stations operated by the Company (DHLP) in the Territory (Pakistan). Clause 5.4 of the Agreement provides that in case of termination of Agreement appellant cease to use in its corporate name or by advertising or otherwise directly or indirectly the identifying the characteristics used by the Network, literature or promotional material of the Network. From these provisions it is abundant clear that the appellant was allowed to use the name of DHLI and its Network abroad against consideration and appellant's operation and carrying of business in Pakistan is fully identifiable with the operation and business of DHLI abroad.
13. The moot question is whether or not the appellant is receiving franchise service from DHLI. In this regard it is appropriate to refer to the definition of franchise, which is available in the Sindh Sales Tax on Services Rules, 2011 since inception. Rule 2 (ix) of the Rules, 2011 and reads as under: "ix. ("Franchise" means an authority given by a franchiser under which the franchisee is contractually granted any right to produce, manufacture, sell or trade in or do any other business activity relating to goods or provide service or to undertake any process identified with franchiser against a fee or consideration including royalty, technical fee, trade mark, trade name, logo, brand name or any such symbol, as the case may be, is involved."(Emphasis is supplied)
14. Effective 1 February, 2012 the said definition was amended and read as: ix. ("Franchise" means an authority given by a franchiser under which which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark , trade name, logo, brand name or any such representation or symbol, as the case may be, is involved;] (Emphasis is supplied)
15. If we consider the definition of franchise in the rules it appears that the same is very exhaustive and cover various aspects of "franchise". The said definition apart from other aspects of franchise provides that "or to provide services or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee (Emphasis is supplied) whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be involved". From this definition it is clear that for deciding whether or not the relationship of franchiser and franchisee exist between appellant and DHLI, it is sufficient that the franchise (DHLP) is providing services or is undertaking any process identified with franchiser.
In this case DHLP are providing courier services or undertaking a process of handling documents and parcels which job under the Agreement is assigned to DHLP under the name of Networking against payment of "Network Fee". Under the definition clause of the Agreement "Network" is defined "shall mean the international transportation network around the world carrying on business under the style or name of "DHL" who offer to their customers an international document and parcel delivery system and provide pick-up and delivery facilities similar to those described herein". From this definition it is apparent that the appellant is undertaking a process which is identifiable with franchiser (DHLI) against a fee or consideration including royalty or technical fee. (Emphasis is supplied) Mere describing the Franchise Fee as Network Fee in the Agreement does not absolved the appellant from payment of Franchise Fee.
16. It is true that definition of Franchise was inserted by way of sub-section (46) of section 2 of the Act on 11.07.2013, but the argument that the SRB has no explicit authority to deem that payment remitted outside Pakistan V was on account of payment of franchise fee has no force. The amount remitted outside Pakistan is on account ofst using the name and Network of DHLI and for all purposes is Franchise Fee and apparently to avoid payment of tax the word network fee was used in the agreement instead of franchise fee. Even if the definition of franchise is not of available in the Act the same was available in the Rules since inception and in absence of definition relying on plain dictionary meaning is permissible. In the reported case of Bolan Beverages versus PEPSI Co. PLD 2004 SC 860 the Honorable Supreme Court has relied upon the definition of Franchise available in Black's Law Dictionary 6 Edition, which provides that "franchise is defined as a privilege granted or sold, such as to use the name or to sell products or service". It was held by the Honorable Supreme Court that "in its simplest terms, a franchise is a license from owner of trade mark or trade-name permitting another to sell a product or to serve under that name or mark". The appellant runs its business and carrying operation in Pakistan in accordance with the international standards provided by DHLI. The appellant is also using the brand name or trade name of DHL which is a property of DHLI and without permission or license the DHLP cannot use the same and the DHLP is using such franchise services in connection with its business and operation in Pakistan. The definition of Franchise was also considered by the Honorable Lahore High Court in the case of Honda Atlas Cars versus Federation of Pakistan 2016 PTD 1328 and it was held that "franchising is a business relationship between the parties where the franchisor services and facilitates the business of franchiser within defined parameters". Exactly same thing happened in this case. The Agreement provides a method of doing business identifiable with the business of DHLI and a service is being provided by DHLI to DHLP against consideration. The appellant runs its business in accordance with the network facilities provided by DHLI in terms of Agreement which also provides uniform operation and style of service. In our view the relationship of franchiser and franchisee exist between DHLP and DHLI and tax on franchise services has been rightly levied.
17. Tax for the period from January , 2011 to June, 2012. Mr. Saqib submits that the sales tax was wrongly levied from January , 2011 to June 2011. The Act, 2011 was effective from 1" July, 2011 and tax can be levied from 1 July, 2011. Mr. Saqib appears to be correct that Network Fee of Rs.2,726,842,000/- is for the entire tax periods from January , 2011 to December , 2011. Mr. Saqib states that an amount of Rs.1,417,682,695/- pertains to network fees relating to the period January , 2011 to June, 2011 and the Ac has without bifurcating the amount has charged sales tax on the entire amount remitted to Franchiser . It is true that sales tax cannot be levied before the enactment of the Act, 2011.The Sindh sales tax cannot be recovered from January 2011 on the pretext that for that period the appellant has not paid Federal Excise Duty as observed by the Commissioner (Appeals). The Assessing Officer is directed to prepare re conciliation for bifurcation of the amount pertaining to January , 2011 to December , 2011 for charging Sindh sales tax for the period from July , 201 1 to December , 201 1.
18. Sales Tax pertaining to other provinces. Mr. Saqib submits that NWF pertaining to other provinces cannot be taxed in Sindh under SST Act. He submits that if NWF or any part thereof is treated as Franchise Fee (FF) the same is not payable in full in Sindh, since the DHLP is operating across Pakistan and providing services to customers by using the name of DHL the tax on alleged FF is payable in all provinces and Islamabad Capital on proportionate basis. No break up in this regard is available on record. The appellant failed to place on record the necessary details with regard to share of other provinces. The appellant has also not paid a single penny to any of the provinces in this regard and in absence of details and payment and breakup this ground has no force.
19.Double Taxation. Mr. Saqib submits that courier services are subject to Sales Tax and the DHLP is collecting and depositing the tax on said courier services in the respective provinces. The sales tax on courier service and sales tax on franchise services are two separate incidence of tax and cannot be mixed with each other. The appellant is not paying sales on courier services, but is only collecting sales tax from its customers as agent of the Government and by collecting tax it is not absolved from payment of sales tax on franchise services which it is receiving from a non- resident franchiser. The double taxation is not prohibited under the Constitution.
There can be double taxation if the legislature has distinctly and expressly enacted it. However in absence of specific enactment the Court should lean in favor of avoiding double taxation. In this case there is no question of double taxation as in the 2 Schedule both services are distinctly defined.
20. Foreign Exchange Manual (FEM): Mr. Saqib submit that FEM provides guide line for payment of franchise fees upto,5% of the net sales (excluding sales tax). He then submits that whatever amount was remitted by DHLP to DHLIth st nd was with the approval/knowledge of State Bank of Pakistan and they have also not raised V point that the amount includes element of Franchise. He next argued that the State Bank of Pakistan did not allow remittance of Franchise Fee of more than 5% of the net sales excluding sales tax and refer to clause (ii) of Para 10 of Chapter XIV of the Foreign Exchange Manual. We have perused the FEM. The correct provision appears to be sub-clause (b) of clause
(ii) of paragraph 12 of Chapter 14 of FEM. The appellant till date has not approached the State Bank for remitting Franchise Fee. The provision provides that percentage/amount of fees etc., for other non-manufacturing projects may also be upto the maximum of 5% of net sales (excluding sales tax). The appellant is a non-manufacturing concern dealing in providing services. From perusal of this provision it appears that the same is not mandatory as no consequence of breach of provision or it non-compliance has been provided in the provision itself. The provision appears to be an enabling and directory provision. A mandatory statute may be defined as one whose provisions or requirements, if not complied with, will render the proceedings to which it relates illegal and void, while a directory statute is one which where non compliance will not invalidate the proceedings to which it relates. The question whether a law is mandatory or directory depends upon the intent of legislature or rule making authority and the intention is to be ascertained from the phraseology of the provision. Furthermore the Foreign Exchange Manual has been framed under the Foreign Exchange Regulation Act, 1947 and in case of any conflict between the provisions of Sindh Sales Tax on Servicers ACT, 2011 and the Foreign Exchange Regulations the provisions of Act of 2011 will prevail. The Act of 2011 does not place any restriction upon the quantum of remitting the franchise fee. The parties are free to enter into lawful contract with each other and are bound to perform it and third party has no right to interfere to frustrate the agreement. In our view the FEM is not a hurdle payment of sales tax to SRB.
21. Storage Services: Mr. Saqib submits that the storage services provided was not taxable at the relevant tax periods.
He then submits that the tax was levied invoking Rule 40-A which pertains to services provided by Airport Operators and Airport Terminal Operators and not by courier services provider. The tax cannot be levied unless the service is listed in the 2' Schedule. Mr. Saqib is correct in this regard. The tax was levied invoking Rule 40-A which rule pertains to services provided by Airport Operators and Airport Terminal Operators and not by courier service provider. The appellant at no stretch of imagination be treated at par with Airport Operators and Airport Terminal Operators. The tax can only be levied by clear and unambiguous words. There is no room of any intendment. The rule which was framed for Airport Operators and Airport Terminal Operators cannot by stretch of imagination be applied on courier service provider. The appellant is not liable to pay sales tax on its storage services.
22. Penalty & Default Surcharge: Mr. Saqib referred to his written submission in this regard and submits that unless menu rea & malafides are established the penalty and default surcharge cannot be imposed. He relied upon the reported case of Honorable Supreme Court in the case of D.G. than Cement Co. Ltd. versus Federation of Pakistan (2004) 90 Tax I (S.C.Pak.). The Assessing Officer and Commissioner (Appeals) also imposed default surcharge and penalty upon the appellant. The appellant had paid considerable amount of sales tax to the department on its courier services which shows its intention to comply the statutory provisions. There is a serious contest between the parties regarding the chargeability of tax on franchise services. The default surcharge and penalty can only be imposed if non- payment of tax on the part of appellant is proved as malafide, willful and having an element of mens rea, which is lacking in this case. The word "default" necessarily imports of an element of negligence or fault and means something more than mere non-compliance of statutory provisions. To establish default the Department must establish that the non-compliance of statutory provisions has been due to some avoidable cause. Mere non- deposit of tax without element of willfulness and malafide cannot entail default surcharge and penalty. In the reported case of Pakistan through Secretary Ministry of Finance and others versus Hardcastle Waud (Pakistan)
Limited (PLD 1967 SC 1) in his separate note Mr. Justice (as he then was) Hamoodur Rahman has held that "Even in the case of a statutory fence the presumption is that mens rea is an essential ingredient unless the statute creating the offence by express terms or by necessary implication rules it out". In the reported case of Collector Customs versus Nizam Impex (PTCL 2014 CL 426 (SHC) a learned DB of Sindh High Court has held that "if the party did not act malafidely with intention to evade the tax, the imposition of penalty and additional tax and surcharge is not justified. In such circumstances the Tribunal has discretion to waive/remit additional tax and penalty". Same is the position in this case the department has failed to establish mens rea, malafides, willfulness and contumacious4 . default on the part of appellant, which are necessary elements for imposing penalty and default surcharge. In the reported case of Deputy Collector, Central Excise and Sales Tax, Lahore versus ICI Pakistan Limited, Lahore PTD 2006 1132 the Honorable Supreme Court has held that "In an appropriate case of default in payment of sales tax, a manufacturer or producer of goods could be burdened with additional sales tax under section 34 of the Act as well as penalty under section 33 of the Act. However, it does not necessarily follow that in every case such levy was automatic requiring no determination at all." In this case also there is no independent determination at all in this regard and it was taken for granted by the forums below that the liability to pay default surcharge and penalty is a necessary consequence or corollary of non-payment of sales tax within stipulated period. In view of the above we are satisfied that the default surcharge and penalty was imposed without any just cause.
23. Mr. Saqib has stressed upon the submission of Mr. Sohail learned DC for the Respondent that the Network Fee
(NWF) remitted by DHLP abroad includes the element of Franchise Fees. First of all this statement is against the pleadings and the basic stand of the Department and cannot be relied upon in absence of any supporting documents or arguments. Mr. Sohail Kalhoro is an officer of SR8 and not a professional advocate and this may be a slip of tongue. Secondly Mr. Sohail immediately corrected this statement by saying that the entire amount remitted by DHLP to DHLI was in respect of franchise fee. Only on the basis of some statement of the Departmental Representative which appears to be again st the basic stand of the department the plea of the appellant that only a portion of Network Fee is franchise fee cannot be accepted.
24. Alternate submissions regarding Rule 36 of SST Rules, 2011 and amendments made therein: Mr. Saqib Masood is right in arguing that since the proceedings were pending amended rules will be applicable and there appears no question of retrospectivity. Rule 36 provides that the assessable value for the purpose of levy of 10% sales tax shall be the gross amount remitted or paid to the franchiser or the amount laid down in the franchise agreement and in case there is no proper agreement of payment of franchise fee proviso No. 2 to rule 36 will apply in this case. In this case there is a formal agreement between the parties and the said agreement provides the mechanism of payment as well as the rate of payment. The appellant has also made payment in terms of Agreement. The appellant in presence of the Agreement and the payment made in consonance thereof cannot take shelter into the provisions of Rule 36. Proviso of Rule 36 is not applicable to this case. Mr. Saqib is right in arguing that at the relevant time when Rule 36 was amended the proceeding were pending either before the Assessing Officer, Commissioner (Appeals) and this Tribunal the amended rule can be applied without going into the question of retrospectivity. The rule or procedure can be applied on the pending proceeding without going into its retrospectivity .
25. The contention of Mr. Saqib that Tariff heading 9823.0000 provides tax on franchise services and not on Networking Fee and the entire amount remitted by DHLP to OHL! cannot be treate d as consideration for receiving franchise the Network fee includes various other heads and one head may be of franchise fee has some force, but in absence of any necessary breakup of the amount remitted the bifurcation is not possible. The appellant acknowledged that the total amount remitted was under one head i.e. Network Fee. The Financial Statement also contains single entry under the name of "Network Fee". The appellant could not place on record any accounts in this regard and acknowledged that the amount under the name of Network Fee was remitted without any bifurcation.
Note 17 of the Financial Statement of 2011 also mentioned about payment of Network Fee without any bifurcation.
26. In view of the above discussions the appeal is partly allowed. The appellant is not liable to pay sales tax for the period from January, 2011 to June, 2011. The Appellant is also not liable to pay sales tax on its services of storage. The appellant is liable to pay sales tax on franchise service for the periods from July, 2011 to December, 2011. The learned Assessing Officer will calculate the amount and will inform the appellant within one week from the date of receipt of this order. The appellant is also not liable to pay penalty and default surcharge if it discharges its tax liability within sixty days from the date of receipt of calculation from the Assessing Officer.
The Appeal is disposed of as above.
Muhammad Ashfaq Balouch (Justice Nadeem Azhar Siddiqi)
Member Judicial Chairman Karachi Dated: 16.05.2017 Copies supplied to:-
1. The Appellant through authorized Representative.
2. The Assistant Commissioner, SRB, Karachi.
Copy for information to:- 3) The Commissioner (Appeals), SRB, Karachi.
4) Office copy.
5) Guard file.