Agha Kafeel Batik, Member Technical : This appeal has been filed by the appellant challenging the Order-in- appeal No. 153/2015 dated 29.06.2015 passed by the Commissioner (Appeals) in Appeal No. No.143/2014 confirming Order-in- Original No. 602/2014 dated 07.11.2014 passed by the Assistant Commissioner (Mr. Vickey Dhingra), SRB, Karachi.
1. The facts of the case briefly are as under: i) The appellant is engaged in providing taxable services of stock brokers falling under tariff Code 9810.1000, read with rule 41, who provided various other services also, which according to AC-lll, SRB are also taxable falling under tariff Code 9819.1000, 9824.0000, 9813.8100 and 9813.6000. As per its statement of accounts the figures of revenue receipts for the two calendar years ending 31.12.2012 and 31.12.2013, from various sources were as under:- Amount (figures in millions) a) Commission on Securities210.903 b) Commission on Forex Dealing4.705 c) Commission on Commodities Brokerage0.876 d) Management Fee 3.458 e) Advisory & Consultancy Services13.356 f) Others 8.048 241 348 Sindh Sales Tax @16% 38.615 Less Paid 22.412 Balance payable 16.2013 a) However, subsequently through a rectification order under section 76 he added taxable value of 'advisory and consultancy services' and tax @ 16% thereon in the final tabulation of payable tax, as although these were discussed in detail in the body of assessment order these were omitted in working out the tax payable in the last paragraphs, particularly para -18.7 of the order-in-original. b) In the appeal before us the learned A.R. filed his written comments and also submitted his verbal arguments.
Firstly he objected to what he called issue of multiple show cause notices which according to him changed the nature of assessment under section 23 into audit. c) The record has been examined. It reveals that the AC-Ill, SRB issued following notices before finalizing assessment under section 23 on 07.11.2014 Date of issuance i) Show cause notice 12.05.2014 ii) Letter / notice in continuation to S.C.N. dated 12.05.2014 31.02.2014 iii) Letter / notice " 04.07.2014 iv) Letter / notice " 14.07.2014 The allegation against the appellant are that during scrutiny of monthly sales Tax returns for the above tax periods it has been revealed that appellant had paid Rs.22,412,436/. as Sindh Sales Tax, whereas profit and loss accounts of appellant for the tax period ended December 31, 2012 and December 31, 2013 shows that they have earned 109,802,428/. And Rs.131,545,925/= respectively from taxable services falling under aforementioned tariff heading that involves Sindh Sales Tax amountin g to Rs.17,568,388/. and Rs.21,047,348/= respectively . It was further alleged that sales tax amounting to Rs.16,203,300/= for the above tax periods is still outstanding against the appellant.
3. In the grounds of appeal the impugned order of the Commissioner (Appeals) is assailed mainly with the grievance that allegedly he failed to look into various defects and infirmities in the order-in-original which were pointed out before the Commissioner (Appeals) in appeal before him. Now therefore same issues have been taken up in these grounds of appeal before us, and are summed up as under:- i) It is alleged that multiple show cause notices were issued before assessment under section 23 and that proceedings were conducted in a manner of audit. ii) That AC-SRB misused the time limitation powers on various reasons. iii) The services of securities transactions provided outside Sindh do not attract SST but the AC SRB imposed tax on the same and the Commissioner (Appeals) ignored his judgment in the case of Foundation Securities on this issue. iv) Commission on brokerage on foreign exchange dealings' is not covered under tariff Code 9813.0000 as allegedly wrongly taxed by the AC. v) "Advisory and research services by stock brokers' were not covered under tariff Code 9813.8100 till 01.07.2014 when same were brought into tax net through amendment in rule 41 of the Rules. vi) Input tax was wrongly disallowed, despite correct claim under section 22 and 22A. vii) Penalty under Section 43 and default surcharge under Section 44 was wrongly imposed. viii) Through his application dated 15.02.2017, filed as a consequence of Appellate Tribunal's order in No.AT-202/2015 dated 30.01.2017 on a rectification application of the AC-SRB in the order in original dated 07.11.2014, the learned A.R. filed an additional ground of appeal on the following issue:- "Advisory and Consultancy services provided by the appellant were wrongly taxed under Code 9813.8100, although not covered under it.
4. The appellant denied applicability/chargeability of Sindh Sales Tax on various services rendered by It and submitted explanation as under:- a) The commission receipts on account of securities transactions in Punjab and Islamabad (I.T.A) are not subject to Sindh Sales Tax. b) About the sales tax on commission from forex dealing it was stated that tariff heading 9813.6000 and advisory and consultancy services taxed under code 9813.8100 could not be assessed under main tariff Code 98.13 which was specific for banking companies, Insurance companies, leasing companies etc. enumerated therein and that as per principle of ejusdem generis the words "other persons dealing in any such services" could be used for such persons which fall in the same class as the persons enumerated in it, whereas the appellant not even being a non-banking financial institution did not fall in this class. He also argued that Code 9813.6000 was specific for persons falling under Code 98.13 and not others. Instead, Code 9813.9000 was specific for foreign exchange dealings but that too related to forex dealers which the appellant was not. About Code 9813.8100 It was argued that it was a general entry and the services of advisory and consultancy would not fit in It, after it is brought under main Code 98.13 as a general entry. c) About `management fee' it was argued that It was share of Revenue income from distribution / sales of mutual funds units of various asset management companies, and was not taxable as the Asset Management Companies from which the share was received had already paid tax on their income. It was also argued that under rule 41 only such commission was taxable which was earned on the trading of shares quoted on stock exchange. Whereas, units of mutual funds were traded oil stock exchange, hence not taxable. The AC-Ill, SRB agreed with the A.R. on this point and no adverse inference was drawn. d) About "others" receipts declared at 8.048 million for both the years it is stated that these include "financial advisory services'', from which revenue was declared at 2.980 Million for both the years and was taxable under tariff heading 9813.8100. Some other receipts under the heading "others" including profit on PMEX deposits, on deposits for cash, capital gain, reimbursement of services charges, adjustment against client default etc. were declared as not taxable by the AC with the remarks "no adverse inference is drawn". e) Finally the AC-III worked out total gross taxable receipts at Rs.35.153 Million on which sales tax was worked out as under: Total taxable receiptsAMOUNT IN MILLION Rs. 35.153 Less paid with returns(-) Rs. 22.412 (-) Rs. 1.656 Total Rs. 1 1.085 Add input tax disallowed Rs. 0.571 Total payable tax Rs. 1 1.657
5. It is noted that show cause notice dated 12.05.2014 was a regular show cause notice pointing out various issues arising from statement of account - of the appellant for the two (2) calendar years ending 31.12.2012 and 31.12.2013. Notice dated 31.05.2014 was issued in continuation to the show cause notice of 12.05.2014, as mentioned in the subject of it and with reference to the letter of the learned A.R. dated 27.05.2014. The AC- SRB rebutted A.R's arguments and tried to clarify the provisions of law under which the value of various services rendered by the appellant were taxable. In para 8 of his order-in-original the AC has also mentioned that his notice dated 31.05.2014 was in continuation to show cause notice dated 12.05.2014. In fact he has not raised any new issue in this letter / notice but has elaborated his point of vi w in respect of all the services under reference. It can be seen that while show cause notice dated 12.05.2014 was quite brief the letter dated 31.05.2014 was detailed and to the point. He also required the appellant to file certain details on the Issue which had arisen from statement of account such as management fee. The point to be noted here is that after obtaining details and explanation from the appellant on the issue on 'management fee' the AC-Ill, SRB being satisfied dropped this issue vide pare 18.4 of his order- in-original, hence instead of facing hardship the appellant has benefited in the end.
Subsequent 2 letters/notices dated 04.07.2014 and 14.07.2014 are also in continu ation to the original show-cause notice dated 12.05.2014. These were necessitated after the learned A.R. submitted his written defence on 12.06.2014 to AC's letter dated 24.05.2014, and there is nothing new but reply to A.R's letter dated 12.06.2014.
Hence allegation of issuing multiple show cause notices and turning assessment into audit is found unsound and just an ef fort to deviate the appellate authorities from the main issues.
6. The learned AR has also raised the issue of extending time limitation by the AC-Ill, SRB on various reasons.
However , it is noted that firstly the time frame of the assessment proceedings unde r section 23 was duly observed and secondly , most of the time was consumed in the correspondence, subm ission of documents, seeking adjournments by the learned AR and also being absent from the hearing as duly recorded by the AC-III in pare 03 of his order . The order has been duly passed within stipulated time after the date of issuance of show cause notice dated 12,05.2014. Hence, this ground of appeal has no force and is rejected.
7. For the brokerage on foreign exchange dealings charged to tax under 9813.6000, advisory and research services taxed under Code 9813.1000 and advisory & consultancy services taxed under Code 9813.8100 the arguments of the learned AR are as under:- These services do not fall under the respective code and that the activities the appellant cannot be taxed by mere use of the words "other persons dealing in such service in heading 98.13 was not sufficient to tax activities of a person, more specifically where every other enumeration is further specified/classified unde r sub-heading of main would not in itself exclude a person since the definition proceeds to state --but not limited to the services listed in the First Schedule.
10. The appellant comes within the phrase -- "other persons" as mentioned in tariff heading 98.13 and provides services of safe deposit lockers / safe vault to its customers. The said tariff heading 98.13 also prescribes a rate of (15%). Therefore, the appellant is liable to pay sales tax at such rote on the services that it provides. However, the learned Bench of the High Court had brought the appellant into the sales tax net by holding, "that the petitioner being a part of a banking company Habib Bank Limited is liable to pay sales tax" and that "banking companies would be liable to pay sales tax on rendering these ten service?, which include the service of safe deposit locker and safe vault respectively under tariff subheading 9813.4900 and 9813.4910. The learned counsel has successfully dispelled the assumption that the appellant is a banking company, but as stated above this fact in itself would not exclude the liability of the appellant to pay sales toe.
9. Thus respectfully following the judgment of the Honorable Supreme Court of Pakistan as quoted above, we hold that the AC-Ill, SRB has rightly taxed all such services which fall in any of the sub heading under main heading 98.13 with the description of "other persons".
10. on the issue of securities transactions rendered outside Sindh the AC-Ill, SRB did not accept the argument of the AR regarding jurisdiction and held that all shares traded were registered with KSE, Karachi, and all trading was done through KATS (Karachi Automated Trading System) which is KSE software. Here trading all over Pakistan is routed through KATS at Karachi /sindh and the services were practically provided or rendered at Karachi; hence taxable under SST 2011. This has been agreed by the AT in principle And some cases including in the case of 161 FINEX Securities Limited (Appeal No. At-185/201S) confirmed in Appeal No. AT-66/14 (Foundation Securities versus SRB), the relevant portion is reproduced as under: "The appellant failed to appreciate that when the broker visits KATS which is an automated online system of 'KSE' the shares are either received / sold to and from in the name of the services recipient by the services provide appellant through KATS.
The entire process of execution of the service from buying and selling cannot be completed without execution and termination of KSE. The principal activity in the whole process of brokerage services takes place at KSE, through the appellant's software which in term Is connected to the terminal located at their registered office in Karachi.
Thus whole of the business activity commences and terminates at KSE.
The appellant being a stockbroker has undertaken transaction on behalf of others at the stock exchange which is in the instant case is Karachi Stock Exchange, thereby undertaking brokerage services at Karachi Stock Exchange which is located in the province of Sindh and consequently attracted Sindh Soles Tax on Services under the provision of SST oS, 201 1."
From above discussion it is apparent the Stock Brokerage income earned from branches outside Sindh is chargeable to tax under tariff heading 9819.10g of Second Schedule of 5575 Act, 201 1."
11.0n this issue the sales was correctly levied.
12.0n the issue of advisory and research services the appellant in ground No.8 has raised the point (beside that it is not covered under tariff code 9813.8100 as it is not the "other person dealing in such service" on the principle of ejusdem generis) that advisory and research services were brought to tax under tariff heading 9819.1000 through amendment in rule 41 of the SSToS Rules, 2011 through SRB Notification No.SRB-3-4/13/2014 dated 01.07.2014.
Hence any advisory and research service preferred prior to 01.07.2014 are beyond taxation under SST Act, 2011.
13. After carefully examining the provisions of law particularly rule 41 we are of the opinion that legislators have often tried to bring various services under tax net through rules, which is not a proper and just means of taxation as rules are made by the SRB and cannot equate with the Finance Act or amendment therein passed by the Assembly . In this case also advisory and research services were not covered under rule 41, unless these by amendment through notification dated 01.07.2 14 whom these were added in clauses (b) & (c) of sub rule (3) of rule 41. Hence we agree with the learned AR on this point and hold that these services should not be taxable till 30.06.2014. However , as the scheme of things are and discussed at length in the preceding paragraphs, period under discussion i.e. F.Y. ending 31.12.2012 and 31.12.2013 are not covered and cannot be taxed. Hence we amend the impugned order of the Commissioner (Appeals) and also order in original of the AC-III, SR8 to that extent.
14. The Assessing Officer and Commiss ioner (Appeals) also Imposed default surcharge and penalty upon the appellant. The appellant had paid considerable amount of sales tax to the department which shows its intention to comply the statutory provisions. There is a serious contest between the parties regarding the chargeability of tax on some services. At the time when order-in-original and order-in-appeal were passed there was confusion whether the appellant is covered under "other persons dealing in any such service". The position was cleared from the judgment of the Honorable Supreme Court in the case of Habib Safe Deposit Vault (Pvt.) Ltd versus SR8 supra, wherein the phrase "other persons dealing in such services" was interpreted. 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 offence the presumption is that mens rea is on 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 limes (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 tox and penalty". Same is the position in this case the department has failed to establish mens rea, malafides, willfulness and contumacious 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 10 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 soles 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.
15. The impugned order of Commissioner (Appeals) is confirmed on all issues, except that referred in preceding paragraphs No. 13 & 14.The appeal is partly allowed and disposed of.
(Justice Nadeem Azhar Siddiqi) (Agha kafeel Barik)
Chairman Technical Member Karachi: Dated: 12.05.2017 Copies supplied to:- 1) The Appellant through authorized Representative.
2) The Assistant Commissioner , SRB, Karachi.
3) The Assistant Commissioner , SRB, Karachi.
Copy for information to:- 4) The Commissioner (Appeals), SRB, Karachi.
5) Of fice copy .
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