Mr. Agha Kafeel Barik Member Technical: This appeal has been filed against order of Commissioner (Appeals), No. 201/2015 dated 23.12.2015 in, whereby he confirmed order in original No. 39/2013 20.01.2015 passed by AC (Unit-16), SRB, Karachi. The AC-SRB vide his said order treated all receipts of PQA under the heading "PQA Charges" and "Royalty" received from Terminal Operator companies (hereinafter called as T.O.Cs) during the financial years 2011-12 and 2012-13, as "Franchise Fee" under I-IS Code 9823.0000 and imposed Rescued rate of Sales Tax @ 10%.
The facts of the case as borne from the record are as under: i) PQA is registered with SRB under the category of Port Operator under HS Code 9819.9090. PQA was formed under PQA Act, 1973 with the main objective to phase out a master plan for a 2nd Port in Karachi as per section 10 of PQA Act, 1973. It was established almost on the same pattern as KDA was established under KDA Order of 1957 and CDA under CDA Ordinance 1960. These organizations were set up to develop land for their objectives. ii) AS the scope of work was gigantic F he. PQA out sourced its job to T.O.Cs which are subsidiaries of international companies. The three TOCs working here are (1) Fauji Oil Terminal Company , (FOTCO), 2) Qasim International Container Terminal (QICT), 3) Fauji Akber Portia Marine Terminal Limited (FAP). Out of these FOTCO is oil terminal, while the other two are container terminals. These TOCs have constructed their terminals and are collecting various charges from the harboring / unloading / loading ships on behalf of PQA and in return they pay to PQA such charges as agreed between the two, including "Royalty". iii) The AC (Unit-16), SRB treated all receipts with the description "Royalty" as "Franchise Fee" and taxed these @ 10%. Incidentally "Franchise Fee was not defined in the Act till 01.07.2013, as such the definition provided in the Sindh Sales Tax Rules, 2011 and dictionary meanings are to be taken into consideration. iv) As per Schedule 14 of the Implementation Agreement between PQA and FOTCO the quantum of 'royalty' is only $0.05 out of total PQA Charges and Royalty $ 0.4735. This works out to 10.56% of total charges. Adopting the proportionate basis (as actual figures are neither made available by the registered person to the AC (Unit-16) nor at the appellate stage before us), as provided by the learned advocate for the appellant, the figures of "royalty" earned in two financial years would work out as under: Period Value of Service Rate of Tax Sindh Sales Tax 2011-12 Rs.18,777,668/= SST @ 10% Rs.1,877,767/= 2012-13 Rs.34,724,131/= SST @ 10% Rs.3,472,431/= v) The AC-SRB has made reference to Rule 36(iv) of 2011 Rules, which provides that the liability to deposit tax on 'Franchise Fee' or 'Royalty' shall be on the franchisor in case franchisor and franchisee both are locally based. In sub-rule the two terms "franchise fee" and "royalty" arc used synonymously. vi) The appellant an the other hand has denied that it has received any franchise fee or even royalty, although emphatically mentioned and discussed in the Implementation Agreement with TOCs. It claims that it was a misnomer. It was stated by the counsel of the appellant that the fact was that land was physically let out / leased to TOCs to carry out their operations and thus the receipts were wrongly declared under the head royalty, which is in fact "rent" of the land involved. However, it was explained by the learned A.R. that there were two elements of such 'rent'; one was fixed and was minimum rent payable by the TOCs, occupying the land irrespective of the volume of business, the other portion was variable and is linked with the tonnage and number of containers of the cargo handled by the Terminal operators, named "royalty". vii) The AC has discussed al length the definition of 'franchise" under section 2(46) of the Act as well as dictionary meanings of the term and spelled out main ingredients of the franchise business. Most of these are available in every business relationship, be it dealership, commission agency, franchise etc. The AC has also discussed the clauses of individual agreement between PQA and each of the three TOCs. However, most of the terms of agreement are common to each other. Basically these were for the rights granted by PQA to these PQAs as exclusive concession rights and license to design, finance, insure, construct, test, commission, complete, own, operate, manage and maintain container terminal at the site on build, own and operate basis. It is Also provided in the agreement with QICT that "it will be entitled to collect all containers and other cargo handling charges for cargo using the container terminal and that it will be authorized to collect wharfage on behalf of PQA as per tariff laid down in gazette notification. In return QICT will pay royalty to
3. The Commissioner (Appeals) in his appellate order has confirmed findings of the AC-SRB on the definition of "franchise services" and confirmed the order in original in toto. Hence this appeal filed against the impugned order before us.
4. As per agreement with Fauji Akbar Portia Marine Terminals (Pvt.) Ltd. (herein called FAP) it was agreed that FAP like QICT will have rights to design, finance, insure, construct, test, commission, complete, operate, manage and maintain the terminal to handle the import and export of cargo at the port on "build, operate and transfer (BOT)" basis,. FAB is also authorized to demand collect and retain tariff charges from the customers for the usage of the terminal and charges for its services as per agreement, beside to demand and receive for its account all handling charges for cargo using the Terminal as per tariff. And in consideration of these concessions FAP will pay royalty to PQA.
5. In the agreement with Fauji Oil Terminal and Distributor company (FOTCO) terms were almost the same except that vide Article 5.1 of the Agreement between PQA and FOTCO, in consideration of the company's undertaking, the design, construction, operation, management and maintenance of the terminal, PQA undertakes to provide a throughput of four million tons of oil per annum based a GOP guarantee and that from the date of successful commissioning PQA would pay to FOTCO in Pak Currency throughput charges at the specific rates after deducting PQA charges including royalty as per Schedule 14 of the Agreement.
6. In rebuttal to the arguments of the learned counsel that PQA has received only rent against land given by it to TOCs, the AC-SRB observed that it was factually incorrect as there were separate provisions in the agreement for payment of rent as well as for charge of royalty. All the agreements, as pointed out by the AC-SRB are termed as "Implementation Agreement" but claimed as rent agreement.
7. The appellant could not give up the break-up of figures of "Royalty" and those of "PQA Charges", and instead replied that FOTCO never paid the amount to PQA. As such the AC-SRB decided that total amount of Rs.177,781,063/- for financial year 2011-12 and Rs.328,827,000/- pertaining to financial year 2012-13 fall under "Royalty" and treated the entire amount as franchise fee.
8. The learned AR for the appellant argued that as evident from the respective agreements between PQA and the three TOCs, the PQA had outsourced its job of not only constructing terminals but also operating and receiving wharfage on behalf of PQA from the incoming ships.
9. The learned counsel for the appellant took the plea that the charges, were of two types, fixed charges which were in the nature of rent and the other variable which were linked with the quantum of business and were payable as per international rates and as agreed and notified in the gazette.
The nature of receipts being distinct the rates are also available in the Schedule 14 wherein royalty payment was made $ 0.05% and PQA Charges of $0.4235. The rates of royalty (value of service) received @ $0.05 works out to 10.56% of the total sum of PQA Charges and Royalty, which are worked out as under: F.Y. 201 1-12 Rs.18,777,668/= F.Y. 2012-13 Rs.34,724,131/=
10. The learned A.R. of the appellant has vehemently dispelled the idea of rendering franchise services and submitted that being a port operator it has granted concessions to various TOC's to build and operate terminals on its land for the purpose of loading and unloading of cargo from ships, under implementation agreements. These TOCs have constructed and established terminals out of their finances and are operating the terminals to handle cargo of shippers. In return they share part of their proceeds with the appellant which is termed as "royalty" in the Implementation Agreement. It is also denied that PQA renders any technical assistance to TOC's, nor they use logo of trademark of PQA. It is also argued that since the appellant does not render any technical service to the TOCs, the question of charging sales tax on services does not arise.
11. From the facts placed on record and the argument submitted by the both the sides the following picture emerges. i) PQA was established by the government to create an alternate port for containers and oil in Karachi and it is the function of PQA to provide proper place and facilities to handle cargo arrived at its port. ii) The moot question is whether or not the appellant is providing franchise service to three TCOs. In this regard it is appropriate to refer to the definition of franchise, which is available in tile Sindh Sales Tax on Services Rules, 2011. 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."
Effective 1st February, 2012 the said definition was amended and read as: ix. ["Franchise" means an authority given by a franchiser under 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 of 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;] 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 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 dear that for deciding whether or not the relationship of franchiser and franchisee exist between appellant and Three TCOs, it is sufficient that the franchise is providing services or is undertaking any process identified with franchiser. In this case TOCs are providing services or undertaking a process of handling cargo on behalf of appellant, which in fact is the job of the appellant, which job under Implementation Agreements were assigned to the TOCs against payment of "royalty". iii) Although claimed at various levels the status of PQA is not that of a government organization, nor it is covered under Article 165 of the Constitution. Even if it is considered a local authority for argument sake, the judgment of the Honorable Supreme Court of Pakistan reported as PLD 2017 Supreme Court 53, in the case of Province of Punjab v/s M/s Tufail & Company cited by the defendant AC-SRB has settled this issue for ever. The Honorable Supreme Court has held that "when it (the government) engaged in commercial activities it was not exercising' sovereign power, that it was engaged in business / commercial activities and merited no undue advantage over ordinary litigants". It has further held that "commercial activities of government must be regulated in the same manner as those of the private sector; it could not be exempted therefrom simply by the dint of being a government". iv) The judgment of A.T.I.R. reported as 2014 PTD (Trib.) 1428 in the case of K.P.T. also supports the department instance as although the appellant claimed these as rent agreements, in reality these. were implementation agreement and there was no justification given at any stage, for using the word 'royalty' for the word 'rent'. v) On the other hand in unreported judgment of A.T.I.R. in the case of PQA dated 26.08.2015 in Federal Excise appeals the order in favor of PQA has been given with the pre occupied notion that PQA being a government owned Port Authority cannot be treated as a "franchisor", which is far from reality and also not in conformity with the judgment of Supreme Court of Pakistan referred above.
Pakistan Post office is one good example of franchising its functions in last few years, to reduce expenditure and to increase revenue. vi) The ATIR in its judgment dated 26.08.2015 in the case of PQA has erred to appreciate the basic facts of the case. In the concluding para it has held that "merely on the basis of some identical nomenclature the revenue earned from terminal operators for use of land facilities cannot be treated as 'franchise fee'. In holding this the learned ATIR failed to appreciate that it was not merely use of land and the facilities attached with it, rather it was much more; from handling and establishing terminals to the regular operations, and then doing what was to be done by PQA -- handling cargo and charging various fees and charges from shippers. The PQA did not assign all these rights merely to earn rent on land. Thus we hold that the judgment of ATIR, given without proper appreciation of facts is per in-curium and cannot be relied upon. vii) On the other hand the ATIR in its judgment in the case of KPT reported as 2014 PTD (Trib.) 1428 has disagreed with the learned AR who has termed implementation agreements' as rent agreements.
We have to point out here that except for the names and places both the cases of PQA and KPT are of the same nature. The learned Tribunal has 1,eld that law of rent is a self-contained law wherein the rent of a site is equal to the economic advantage obtained by using the site in its optimal or most productive use. viii) In the case of PQA, as also stated above the agreement and relationship of PQA with TOCs stretch beyond the relationship of tenant and landlord It is particularly noted that the rights were assigned to TOCs initially under BOT (build, operate and transfer) agreements. The TOCs are doing what the PQA was chartered for under PQA Act, 1973. The PQA has given its land for which it is also getting rent, beside PQA charges, share in wharfage as well as royalty which is franchise fee. It is pertinent to note here that rent or lease is a fixed amount and is not related to the quantum of business of the land lord. On the other hand royalty or franchise fee is variable and in correlated to the quantum of business activities. ix) The legislators had no ambiguity in this regard as in rule 36(iv) of the 2011 Rules the terms franchise fee and royalty are juxtaposed as these are used synonymously in respect of the consideration for the franchise services. For convenience sake it is reproduced as under: "In case where the franchiser and franchisee are both locally based the liability to deposit the tax on franchise fee or royalty shall be upon the franchisor".
On the other hand it is hard to accept that rent is synonymous to royalty as leaned AR has tried to emphasise.
12. In view of above discussion we hold that the action of the AC-SRB in treating the receipts to the extent declared under the head "royalty" as franchise fee is justified. However, the determination of value of service on the basis of summing up "royalty" and PQA Charges together as franchise fee is not correct and the learned AR admitted 'chat it was difficult to bifurcate the figures under the two heads.
However, on the basis of royalty rate ($ 0.05) as per agreement, the ratio of royalty receipts' against total receipts/PQA charges works out to 10.56% of the total receipts.
13. The Assessing Of ficer has also imposed penalty and default surcharge.
The Commissioner Appeals while dismissing the Appeal upheld the default surcharge, but setaside the penalty. The default surcharge can be imposed if the default is willful and contumacious mild the department has established mensrea, which is lacking in this case. There is a serious contest between the parties regarding the value of service and chargeability of tax and that mensrea is also lacking.
14. 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 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 (lie tax, the imposition of penalty and additional tax and surcharge is not justified. 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 imposing penalty and default surcharge. 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 was imposed without any just cause.
15. The impugned orders are therefore modified to the extent that the appellant is liable to pay Sindh sales tax on franchise service on the values of service as mention in para 2 (iv) above and that the appellant is not liable to pay any default surcharge.
16. The appeal is partly allowed in the above terms and is disposed of. (Justice Nadeem Azhar Siddiqi) (Agha Kafeel Barik)
CHAIRMAN TECHNICAL MEMBER Karachi Dated: 19.04.2017 Copies supplied for compliance:-
1. The Appellant through authorized Representative.
2. The Assistant Commissioner (Unit-), SRB, Karachi, Copy for information to:-
3. The Commissioner (Appeals), SRB, Karachi.
4. Office Copy.
5. Guard File.