Justice (R) Nadeem Azhar Siddiqi: This appeal has been filed by the appellant challenging the Order-in-appeal No. 166/2016 dated 30.09.2016 passed by the Commissioner (Appeals) in Appeal No. 152/2015 upholding Order-in- Original No. 315/2015 dated 08.06.2015 reducing the principal amount to Rs.1,083,614,963/= and the penalties on this amount passed by the Assistant commissioner (Ms. Lubna Najmi), SRB, Karachi.
1. In short, the facts of the case as stated in Order-in-Original are that the appellant is registered with Respondent and are engaged in providing and rendering reinsurance services in Sindh province under tariff heading 9813.1000 of the second Schedule of the Sindh Tax on Services Act, 2011 (hereinafter referred to as the Act) at the rate of 16%.
2. The allegations against the appellant in the order in original are that perusal of the Annual report for the year ended December, 3013 reveals that the appellant under head of "premium written" in statement of premiums have received gross premiums amounting to Rs.8,659,498,171/= which includes sales tax of Rs.1,385,519,707/= liable to sales tax under tariff heading 9813.1600. It was further alleged that during the scrutiny of records pertaining to the tax periods January, 2013 to December, 2013 it was found that the appellant neither deposited any amount of Sindh sales tax for the taxable services provided or rendered by it nor filed monthly tax returns for the tax periods January, 2013 to December, 2013.
3. The appellant was served with a Show Cause Notice Dated 08.01.2015 for assessment and payment of tax, payment of default surcharge and imposition of penalties. The appellant filed written reply on 17.02.2015 to the show-cause notice. The thrust of the reply of the appellant was that the appellant is a statutory body established under the Pakistan Insurance Corporation Act No. XXXVIII of 1952 (re - organized as Pakistan Reinsurance Company under Companies Ordinance, 1984) and the main business of the appellant is to re insurance with insurance companies incorporated in Pakistan and with foreign re-insurance companies through re-insurance treaties. The Federal Government hold 51% share in the capital of the appellant and limited companies incorporated in Pakistan holds 49% share in the capital. All insurance companies established in Pakistan are required by law to compulsorily re- insure with appellant. The appellant gets further re-insurance from foreign re-insurance companies.
The figures of gross premium includes the reinsurance business received from foreign insurance companies and until the amount is not segregated, the levy of sales tax would be unlawful and without jurisdiction. Exempt insurance businesses like, Maritime Insurance for exports, health insurance and Crop Insurance have been included in total premium figures taken by SRB. The Department sent reply dated 16.03.2015 to the appellant. The appellant submitted another reply dated 20.05.2015 and 03.06.2015.
4. Finally after hearing, the Order-in-Original dated 08.06.2015 was passed levying sales tax amounting to Rs.1,385,519,707/= along with default surcharge and penalties of Rs.423,638,796/= under serial No. 2, 3, 12 and 13 of section 43 of the Act.
5. The Respondent challenged the Order-in-Original by way of filing of Appeal No.151/2015 before the Commissioner (Appeals) who while upholding the order-in-original reduced the principal tax amount to 1,083,614,963/=.
6. Mr. Atif Mufassir the learned Representative of the appellant submits that the Tariff Heading 9813.1000 relates to services provided to a policy holder. He submits that 9813.1000 is sub-sub- heading and a sub-sub heading under a sub-heading has to remain under the sub heading and cannot be invoked independently. He referred to the reported case of Citi Bank passed by the High Court of Sindh reported as 2014 PTD 284. He then submits that the appellant is not providing direct insurance service to policy holders and is not liable to pay tax. He then submits that sales tax was always levied as value added tax and in re-insurance services there is no element of value added resultantly the appellant cannot claim input tax. He then submits that a insurance company forwards its liability towards a re-insurance company for transferring/sharing its risk and by no stretch of imagination there is any value addition.
7. Mr. Mufassir then submits that tax on reinsurance amounts to double taxation for the reason that an insurance company on issuing policy and receiving premium has already charged sales tax from the policy holder who is the ultimate user. He then submits that the same risk was transferred/shared by an insurance company with a reinsurance company and the department is charging tax on a service which was already taxed and paid by the end consumer.
8. Mr. Mufassir in alternate submits that even if it is assumed that the reinsurance service is taxable the tax can be charged effective from July, 2013 when insertion was made in Rules 2011 and word "re - insurance" was added in Rule 31.
9. Regarding penalty and default surcharge Mr. Mufassir submits that the non-payment of tax was not willful or deliberate but there is a serious contest between the parties regarding chargeability of Sindh Sales Tax on re-insurance business. He then submits that mens rea is also lacking in the case. He relied upon the following reported cases: i) 2005 PTD 2412 Rupali Polyester (LHC) Mens rea ii) 2005 PTD 1850 Nestle Pakistan (LHC) Mens rea iii) 2004 PTD 1048 Bhola Weaving Factory (LHC) Mens rea iv) 2014 PTD Citibank (SHC) v) 2015 PTD 752 Warid Telecom (IHC) Double Taxation
10. Mr. Atif Mufassir also placed on record photo copies of clarification from Ministry of Law regarding levy of FED on reinsurance service and working to Show no value addition and double taxation.
11. Mr. Naheed Ahmed learned AC submits as under:- i) The issues involved in this appeal regarding chargeability of tax were already decided by the Tribunal in Appeals No. 02/2013 and 109/15. ii) The agreement between an insurance company and a reinsurance company is a contract of insurance and is covered by tariff heading 813.1600 and is separate service and the appellant provides a distinct service from service of insurance. iii) The premium received by the appellant is shown in the financial statements as revenue and income tax has been paid. He submits that if there is no value addition there is also no economic activity and no income tax in payable. iv) The reinsurance service is a separate and distinct service and there is no double taxation.
Regarding reported case of Warid Telecommunication cited by the learned representative of appellant he submits the same has distinguish facts and that the case deals with interconnect charges having no nexus with the business of reinsurance. He referred to para 4 of the written submission of the appellant. v) Rules are sub ordinate legislature and are clarifactory in nature and no adverse effect can be taken on chargeability of tax. vi) He submits that a definition of another law is not applicable to SST on Services Act, 2011. vii) The mens rea is established in the case for the reason that in another earlier two appeals the matter has been decided and the appellant is fully aware about the chargeability of tax on reinsurance service and non-collecting and deposit of tax with SRB amounts to willful default with the element of mens rea.
12. Mr. Atif Mufassir in rebuttal placed on record the photo copy of a Marine Policy issued by an insurance company which contains the provisions / percentage of reinsurance by a reinsurance company. He then submits that even issues which were decided earlier can be looked into with the submission that earlier issues were not properly contested, argued and decided. He placed on record a write-up in this regard.
We have heard the learned Representatives of the parties, perused the record made available before us and the comments and written synopsis filed by the learned representatives of the parties.
13. Mr. Mufassir has challenged the chargeability of tax on the ground that appellant is not providing direct insurance service to policy holders and is not liable to pay tax. This Tribunal in Appeals No. 02/2013 and 109/15 filed by the appellant against the respondent (SRB) decided the chargeability of Sindh sales tax on re-insurance service as under: "Tariff Heading 98.13 deals with the services provided or rendered by banking companies, insurance companies, cooperative financing societies, modarabas, musharikas, leasing companies, foreign exchange dealers non-banking financial institutions and other persons dealing in any such services.
Tariff heading 9813.1000 (services provided or rendered in respect of insurance to a policy holder by an insurer, including re-insurer) is a sub-heading under 98.13. This Tariff heading is the part of 1st and 2nd Schedule of the Act since inception of the Act. Section 3 of the Act provides that a taxable service is a service listed in the 2nd Schedule to the Act, which is provided by a registered person from his registered office or place of business in Sindh. Section 8 of the Act is a charging section and provides that there shall be charged, levied and collected a tax known as sales tax on the value of a taxable service at the rate specified in the Schedule in which the taxable service is listed. The sales tax on the value of service listed in the 2nd Schedule of the Act can be levied at the Specified rate. The appellant has its office at Karachi and is registered with SRB and is a service provider and is requires to pay sales tax in terms of Section 3 read with Section 5 of the Act. The appellant cannot escape liability of sales tax merely on the ground that definition of re insurance was added to the definition clause effective from July 2013. No doubt the words "including re-insurance" were added in Tariff heading 9813.1600 after the words "other insurance" vide Ordinance XIV of 2011 effective from 1st November 2011 and the same was converted into an Act effective from 26th January, 2012 but this will also not change the position as service of re-insurance is part of Tariff Heading 9813.1000 since inception. For taxing a service it is sufficient that the service is included in the 2nd Schedule of the Act. The mechanism of collecting tax is provided under section 5 of the Act i.e. value of service. In absence of definition in the Act the plain dictionary meaning of the word "re insurance" is to be considered. It is not disputed by the appellant that it is not providing or rendering service relating to re-insurance. The dictionary meaning of "re-insurance" is "insurance of all part of one insurer's risk by a second insurer, who accepts the risk in exchange for a percentage of the original premium. The appellant is exactly providing and rendering service as per plain dictionary meaning of re-insurer. The rules are enabling provisions and the scope of tax cannot be enlarged by rules. Section 8 of the Act provides mechanism of recovery of tax on the value of service. We are therefore, is of the opinion that the service of re- insurance is taxable since inception of the Act and the same can be taxed for the periods from July, 2011 to November, 2011".
14. Undisputedly and undoubtedly the appellant is a re-insurer. The insurance companies are the clients of the appellant and the appellant is providing or rendering of service of re-insurance to them.
From the above findings it is clear that this Tribunal has already decided the chargeability of tax on re- insurance service and the same cannot be challenged in subsequent, proceedings till such time the order of Tribunal is in field. Though the orders of the Tribunal have been challenged before the Honorable High Court of Sindh in referential jurisdiction but, till date the orders have not been setaside.
15. Mr. Mufassir raised a question that sales tax was always levied as value added tax and in re- insurance services there is no element of value added resultantly the appellant cannot claim input tax.
Section 9 of the Act fixed the responsibility of payment of tax on the person providing service and in some case the responsibility shifts upon the person receiving service. In this case the appellant is a service provider of service of re-insurance and is liable to charge and deposit sales tax with SRB. The learned Commissioner (Appeals) in para 4 of the Impugned Order states that "Unless it is otherwise provided in other provisions of the Act or Rules a person providing taxable services is required to charge, collect under rule 26 read with section 9 (1) and pay the amount of tax in the exchequer". He in the same para further states that "Under the proviso of sub-rule (1) of rule 22 such adjustment can be made within 04 succeeding periods. The appellant was a voluntarily registered person but failed to charge, collect and pay the tax and act as such and had ignored the law. It is for this reason that the appellant is facing bar to claim and adjust the input tax or credit adjustments. Had the appellant charged and collected the tax, the appellant could make such adjustment within the period specified therein". The appellant is providing taxable services and in terms of section 15 of the Act read with Rule 22 and 22A of Rules, 2011 can claim input tax. Merely for the reason that the appellant is unable to claim input tax due to its own fault would not absolve it from charging and deposit the tax with SRB.
16. Mr. Mufassir also raised the question of double taxation. The sales tax on service of insurance and on re-insurance services are two separate incidence of tax and are separately mentioned in the Second Schedule of the Act and cannot be mixed with each other. The appellant is not paying sales tax on insurance business and cannot claim that sales tax on re-insurance is double taxation for the reason that some other person/party has paid sales tax on insurance service. The sales tax is payable on the insurance service on the basis of gross amount of premium paid on insurance service and the sales tax is payable on the re-insurance service on the basis of gross amount of premium paid on re-insurance service. 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 2nd Schedule of the Act the service provided or rendered in respect of insurance policy holder by an insurer including a reinsurer is listed under Tariff Heading 9813.1000 and the service of other insurance including re-insurance is listed in Tariff Heading 9813.1600. The Commissioner (Appeals) in para 4 (a) of his order states that "Under section 9 (1) it is the liability of the Appellant to pay the tax, in absence of any rule to the contrary. He further states that "In my humble opinion the burden of tax is to be passed, not onto the premium, but on the insurance companies". The cycle of tax payment completes at the insurance company who is policy holder in case of appellant. Thus the above discussion clarifies that it is a separate incidence, completing its own cycle and thus factually no burden is steering down to the policy holders of the insurance companies". From this discussion it is clear that both the services are distinctly mentioned in the schedule and the incidence of tax is also different and there is no question of double taxation.
17. Mr. Mufassir in alternate submits that even if it is assumed that the reinsurance service is taxable the tax can be charged effective from July, 2013 when insertion was made in Rules 2011 and word "re-insurance" was added in Rule 31. This question is already replied in the earlier orders quoted above and no further discussion is required.
18. Regarding penalty and default surcharge Mr. Mufassir submits that the non-payment of tax was not willful or deliberate but there is a serious contest between the parties regarding chargeability of Sindh Sales Tax on re-insurance business and he also submits that mens rea is lacking in the case.
Though the Tribunal has decided the chargeability in favor of revenue, but the appellant has challenged the orders of Tribunal before the Honorable High Court of Sindh in referential jurisdiction. Sub-section (8) of section 62 provides that save as provided in section 63, the decision of the Appellate Tribunal on an appeal shall be final. Due to filing of Reference by the Department the matter has not been finalized. The Assessing Officer and Commissioner (Appeals) also imposed default surcharge and penalty upon the appellant in this case also. 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, mensrea 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 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 Revenue 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 ICI Pakistan Limited, Lahore PTD 2006 1132 the Honorable Supreme Court has held that "In a appropriate case of default in payment of sales tax, a manufacturer or producer of goods could be burdened with additional sales tax under sec ion 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.
19. In this case the Assessing Officer apart from imposing default surcharge under section 44 of the Act also imposed penalties invoking serial No. 2, 3, 12 and 13 of the Table of Section 43 of the Act. We have' noticed that the Assessing Officers are imposing penalties without any rationale and keeping in view the object and purpose of imposing penalty. The object and purpose of providing several penalties is to use the relevant provision in appropriate case to create deterrent and not to generate revenue. It appears that the Assessing Officers are using the penalty as a source to generate revenue and barring few cases the Commissioner (Appeals) upheld imposition of penalties. In this case subject to fulfillment of criteria of proving malafides, mensrea and willfulness on the part of the appellant the department may impose penalties under serial No. 2 and 3 of the Table of section 43 of the Act for non-filing of returns and non - payment of tax. The Department cannot impose penalty under Serial No. 12 of the Table of Section 43 without specifying the contravention of the provisions of the Act or Rules for which no penalty has been provided in the section. Same is the position with the penalty imposed under Table 13 of section 43 of the Act. Serial No. 2 and 13 cannot be invoked simultaneously. No one can be punished twice for the same offence. In this case there appears no repetition of offence. Non-filing of returns or non-payment of tax for each tax period is a separate offence and cannot be treated as repetition of offence.
20. In view of the above discussion it is held that the tax has been rightly levied on the service of re- insurance provided or rendered by the appellant. The appellant is not liable to pay penalty and default surcharge if the appellant discharges its tax liabilities within sixty days from the date of receipt of this order.
The appeal is disposed of in the above terms.
(Agha kafeel Barik) (Justice Nadeem Azhar Siddiqi)
Member T echnical Chairman Karachi: Dated: 23.05.2017. 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.