SULTAN TANVIR AHMAD, J:- Through this single judgment, I intend to decide the captioned petition as well as Constitutional Petitions No. 59801, 59780, 59784, 59789, 59787, 59797, 59793 and 59800 of 2020, 5035 and 71054 of 2021, 13423, 14432, 31473, 29241, 29271, 32806, 32784, 15533, 31481 and 32732 of 2023, involving common question(s).
2. The petitioner is providing service under item No. 26 of the second schedule to the Punjab Sales Tax on Services Act-2012 (`PSTS-Act'), for security purposes at the sites described in the related agreement to the recipient of the services. Hereinafter, the petitioners shall be called as the `service providers' and other sides of relevant service agreements shall be called as the `recipients of service'. The service providers are registered persons under section 2(33) of PSTS-Act. The dispute between the service providers and the respondent-authority relates to construction of various provisions of PSTS-Act. It is the claim of the respondent-authority that the tax is leviable on the entire invoice amount including salaries or other allowances (the `salaries') that are paid by the service providers to security personnel, labour and manpower (the `individuals'). Learned counsel for the service providers have argued that the claim of the respondent-authority is based on misinterpretation of different provisions of PSTS-Act.
3. Mainly, the dispute hinges on the following provisions of PSTS-Act:- "2(38) "service" or "services" means anything which is not goods or providing of which is not a supply of goods and shall include but not limited to the services listed in First Schedule; Explanation. A service shall remain and continue to be treated as service regardless whether or not rendering thereof involves any use, supply [disposition] or consumption of any goods either as an essential or as an incidental aspect of such rendering; 2(45) "taxable service" shall have the meaning as given to it in section 3;
3. Taxable Services.- (1) Subject to such exclusion as mentioned in Second Schedule, a taxable service is a service listed in Second Schedule, which is provided by a person from his office or place of business in the Punjab in the course of an economic activity, including the commencement or termination of the activity.
Explanation. This sub-section deals with services provided by a person regardless whether such services are provided to a resident person or a non-resident person.
(2) If a service listed in Second Schedule is provided to a resident person by a non-resident person in the course of an economic activity, including the commencement or termination of the activity, it shall be treated as a taxable service.
Explanation. This sub-section deals with services provided by a non-resident person to a resident person whether or not the end consumers, if any, of such services are identifiable for purposes of this Act or the rules.
(3) For purposes of sub-section (2), where a person has a registered office or place of business in the Punjab and another outside the Punjab, the registered office or place of business in the Punjab and that outside the Punjab shall be treated as separate legal persons.
(4) The Authority may, with prior approval of the Government, by notification in the official Gazette, prescribe rules for determining the conditions under which a particular service or class of service shall be considered to have been provided by a person from his registered office or place of business in the Punjab.
(5) For purposes of this Act and the rules, providing of service shall, where the context so requires, include rendering, supply, initiation, origination, execution, reception, consumption or termination of a service whether in whole or in part.
(6) The services mentioned in the First Schedule are not exhaustive and all the services mentioned in the Second Schedule, rules and circulars shall be taxable services.
6. Economic activity. (1) An economic activity means any activity carried on whether continuously, regularly or otherwise by a person that involves or is intended to involve the provision of services to another person and includes-
(a) an activity carried on in the form of a business, including a profession, calling, trade, or undertaking of any kind, whether or not the activity is undertaken for any consideration or profit;
(b) the supply of movable [or immovable] property by way of lease, license or such similar arrangement; and
(c) a one-time transaction or concern in the nature of a business or trade.
(2) Anything done or undertaken during the commencement or termination of an economic activity shall be construed as part of the economic activity.
(3) An economic activity does not include--
(a) the activities of an employee providing services in that capacity to an employer; or
(b) a private recreational pursuit or hobby of an individual.
7. Value of a taxable service. - (1) The value of a taxable service is the gross amount of consideration (by whatever name called such as charges or price) in money including all the Federal and the Provincial duties, taxes or charges, if any which the person providing a service receives from the recipient of the service but does not include the amount of the tax.
(2) In case the consideration for a service is in kind or is partly in kind and partly in money, the value of the service shall mean the open market price of the service as determined under section 8 excluding the amount of the tax.
(3) In case the person who provides the service and the recipient of the service are associated persons and the service is supplied for no consideration or for a consideration which is lower than the price at which the person provides the service to other persons who are not associated persons, the value of the service shall mean the price at which the service is provided to such other persons but does not include the tax.
(4) In case a person provides a service for no consideration or for a consideration which is lower than the price at which such a service is provided by such person, the value of the service shall mean the open market price for such a service.
(5) In case of trade discounts, the value of the service shall mean the discounted price, excluding the amount of the tax, provided the invoice shows that the discounted price and the related tax and the discount allowed is in conformity with customary business practice.
(6) In case there is reason to believe that the value of a service has not been correctly declared in the invoice or for any special nature of transaction it is difficult to ascertain the value of a service, the value of the service shall be the open market price.
(7) Notwithstanding anything in sub-sections (1) to (6), where the Authority deems it necessary, it may, by notification in the official Gazette, fix the value of any service or class of services and for that purpose fix different values for different classes or descriptions of the same or similar types of services but if the value at which the service is provided is higher than the value fixed by the Authority, the value of the service shall, unless otherwise directed by the Authority, be the value at which the service is provided.
Explanation-- For the purpose of this section, the value of the utilities or facilities, if any, ancillary to providing of taxable services shall be included in the value of such services.
(8) The Authority may, by notification in the official Gazette, issue valuation rules for any service or class of services for purposes of assessment or determination and payment of tax under this Act and prescribe threshold, parameters, standards, methods, formula, criteria or bases for the determination of value of any taxable service or class of taxable services and the assessment of the tax on any service or classes of services.
Note: The phrase "gross amount of" was added in sub-section (1) through the Punjab Finance Act, 2014.
10. Scope of tax and allied matters. (1) Subject to the provisions of this Act and the rules, there shall be charged, levied, collected and paid the tax on the value of a taxable service at the rate or rates specified in the Second Schedule.
(2) The Government may, on the recommendation of the Authority and subject to such conditions and restrictions as the Government may impose, by notification in the official Gazette, declare that in respect of any taxable service provided by a registered person or a class of registered persons, the tax shall be charged, levied and collected at such higher, lower, fixed or specific rate or rates as may be specified in the said notification.
(3) Notwithstanding other provisions of this Act, the Authority may, with the prior approval of the Government and by notification in the official Gazette and subject to the conditions, restrictions, limitations or otherwise, fix the limit or threshold of annual turnover of any service or class of services provided by any person or class of persons below which such person or class of persons shall be exempt from payment of tax under the Act.
(Underlining is added)
4. Section 10 ibid outlines the scope of service tax which reads that subject to the provision of PSTS- Act and the rules, there shall be charged, levied, collected and paid the tax on the value of the taxable service. Mr. Sajid Ijaz Hotiana, emphasized that the value of taxable service, as given in section 7 of PSTS-Act, is the gross amount of consideration which the service providers receive from the recipients of service, therefore, the entire amount of invoice is liable to be taxed, at the rate provided in the relevant schedule. The value for the purposes is of taxable service, which is given in section 3 of PSTS-Act that reads... a taxable service is a service listed in second schedule, which is provided by a person from his office or place of business in Punjab in the course of an economic activity. However, section 6(3) of PSTS-Act has specifically excluded the activities of employees providing service in that capacity to the employer, from the purview of economic activity.
5. Mr. Khurram Shahbaz Butt, learned Amicus Curiae invited the attention of the Court towards the agreement between the service providers and the recipient(s) of service. A reading of which clearly reflects that the individuals deployed at the sites of the recipient(s) of service retain their positions of employment with the service providers. The recipient of service can merely specify the sites but having no control vis--vis the expertise of the individuals. Command as to how to perform duties is with the service providers. For example, in the captioned case the petitioner is one who can direct how to discharge the duty and has full control as to performance. The salaries are to be paid by the service providers to the individuals though after receiving the same from recipients of service.
Clause 14 of the service agreement dated 27.04.2022 involved in the titled petition provides that the service providers are responsible for timely payment and liabilities of the individuals in accordance with the applicable laws for time being in force. This also includes EOBI and social security benefits.
The recipient of service, as per the relevant agreement is under no obligation to directly pay any remuneration to the individuals. By all means, the individuals are the employees of the service providers.
6. A holistic examination and reading of the provisions of PSTS-Act clearly reflect that for a service to be taxable, it must be an economic activity of the service providers conducted as a business, profession, or trade, whether or not for profit. In "Messrs Quick Food Industries"[1] case similar anomaly, created due to amendment in rules framed under the Sindh Sales Tax on Services Act- 2011, was resolved by the Honourable Supreme Court of Pakistan. Paragraph No. 8 of the same reads as follows:- "8. Upon reviewing these provisions of the Act in conjunction, it becomes evident that the amount of sales tax on services levied is based purely on the value charged by the service provider for the service it renders, which value is determined by the service provider itself, establishing a connection between the consideration paid and the service provided. Moreover, for a service to be taxable, it must be listed in the First Schedule and involve an economic activity conducted as a business, profession, or trade, whether or not for profit. The service is treated under the Act as an economic activity and will not include the activities of the employee to carry out the service. As per the procedure under the Rules, the service provider is required to collect and deposit the tax in the government treasury, for which purpose, the service provider issues an invoice that includes the value of the service including the salaries paid, and other expenses associated with security and manpower."
It would also be insightful to look at the following concluding part of said judgment.
"10. After carefully examining the relevant provisions of the law and the case law in this respect, we find that Petitioner's argument that the gross amount charged includes all amounts, including reimbursable expenses such as salaries, lacks merit. This is because these amounts are actually paid by the service recipient, and neither do they form part of the economic activity conducted by the service provider, nor of the consideration paid for by the service recipients for the services rendered. Gross amount charged, for the purposes of sales tax on services, relates to the consideration in money paid for the value of the taxable service under section 5, the applicability of which is restricted by section 8 defining the scope of the tax, which means that quantum is charged for the service alone, nothing more and nothing less..."
(Emphasis supplied to the above paragraphs)
7. Now coming to the interpretation put-forth by Mr. Sajid Ijaz Hotiana of section 7(1) of PSTS-Act. He stated that words "gross amount of" were added in the above provision through the Punjab Finance Act-2014 with the intention that the whole invoice amount is taxable. If such interpretation is given, the same contradicts with section 3 of PSTS-Act that makes the taxable activity dependent upon the taxable service i.e. provided in course of an economic activity and then section 6 of PSTS-Act specifically restricts to include activity of employee(s) providing service in that capacity to the employer. Adopting harmonized approach, to me it is clear that the words "gross amount" in section 7 of PSTS-Act are introduced, through the Punjab Finance Act, 2014 to clarify that tax is to be levied on the amount that include all the taxes or duties, Federal or Provincial besides sales tax on services. The words "gross amount of" if given construction to include the salaries results into redundancy of section 6(3) of PSTS-Act. No provision of an enactment can be treated as redundant or surplus and should be given its meaning and effect. It is settled principle of construction of statutory provision or rule that the Courts should avoid any interpretation of an enactment or rules that flouts common sense and results into absurdity and the Court should always give effect to the same by interpreting it in the manners that is in accordance with the judicially presumed parliamentary concern for common sense and justice[2].
The Courts should also avoid clash of seemingly contradicting and must harmonize the contradictory provision by interpreting not only the provisions but also the wisdom of the legislature in order to give effect to both the provisions[3].
8. In my opinion, the respondent-authorities while demanding tax on the salaries of the individuals have also overlooked that while interpreting a taxing statute, one has to look into the words of the statute and then to interpret it in the light of what is expressed in the relevant provision as well as its surrounding provisions. It cannot be implied which is not expressed. There is no room of import or impute something in a fiscal statute[4]. At the same time, when more than one interpretation is fairly and reasonably possible then which leads to manifest absurdity or injustice must be avoided.
It would be a lamentable and intolerable state of the law if it were not so[5].
9. The power to tax service is derived by the Province from entry No. 49 of Fourth Schedule, under Article 70(4) of the Constitution of Islamic Republic of Pakistan-1973 (the "Constitution"). The Federal Government has exclusive power to legislate with respect to the federal legislation list and the Provinces can only make laws, which are not enumerated in the said list. The exception, in the above entry, permits the respondent-side to impose the sales tax purely on services. In this regard, the learned Sindh High Court in "Sami Pharmaceuticals"[6] case has observed as under:- "...As of today, insofar as levy of sales tax on services and the enactment of any Act thereon is concerned, the power to do so is being derived from addition of the exception to Entry 49 ibid, whereby it has been categorically provided that in any circumstances the Federation will not have any authority to make laws for levy and collection of any sales tax on services. It is in this backdrop that the Act in question has been enacted as reflected from its preamble. After going through the aforesaid provisions of law as well as the rules, it clearly transpires that insofar as the authority to levy tax on service is concerned, though the same now rests with the Province pursuant to the exception to Entry 49 of the Fourth Schedule to the Constitution; but it needs to be appreciated that such authority to impose tax is only on services and not on goods or otherwise. It is only the quantum of service rendered or supplied which can be taxed by Province. By no stretch of imagination either by rules or otherwise, it can be extended to any other goods or amount which is not falling within services. Any other definition or attempt to levy such tax would then be in violation of the mandate provided as an exception in entry 49 of the Fourth Schedule to the Constitution."
The construction given by Mr. Sajid Ijaz Hotiana to PSTS-Act is highly absurd, in view of the above provision of the Constitution and exclusion of the services rendered by the individuals to service providers from the purview of economic activity by PSTS-Act, thus, I disagree with him.
10. Lastly, some practical difficulties have been pointed out in factual determination of the component or the part of the invoice on which the tax is to be paid. Guidelines in this regard have been given by the Honourable Supreme Court in paragraph No. 12 of the "Messrs Quick Food Industries" case (supra). The parties to act accordingly.
11. For what has been discussed above, I am of the considered view that only the quantum and component of service is taxable and not the amount being reimbursed by the recipient as salaries of the individuals to the service providers. This petition along-with connected petitions are allowed, in the above terms.
1. Sindh Revenue Board through Secretary Government of Sindh, Karachi and Others Versus Messrs Quick Food Industries (Pvt.) Limited and Others (2023 SCMR 1776).
[2]"Ahsan Khan Versus Government of the Punjab and Others" (2023 CLC 825) (upheld in C. P.
Nos. 20-L, 60-L, 213-L, 218-L and 313-L of 2023). "Muhammad Ahsan Ullah Khan and Others Versus Muhammad Sami Ullah Khan and Others" (PLD 1964 (W.P.) Lahore 101). "Maryon-Wilson s Will Trusts, Blofield v. St. Hill" (1966 M.No. 4666 (1968 Ch. 268).
3. "Messrs Gas Masters CNG Station Versus Federation of Pakistan and Others" (2019 PTD 25).
[4]"Allied Bank Limited Versus The Commissioner of Income Tax, Lahore and Others" (2023 SCMR 1166). "Messrs Saadullah Khan and Brothers (SKB) Versus Appellate Tribunal of Inland Revenue and Others" (2019 PTD 776).
5. "Mrs. Naila Naeem Younus and Others Versus Messrs Indus Services Limited through Chief Executive and Others" (2022 SCMR 1171) (Paragraph No. 19).
6. "Sami Pharmaceuticals (Pvt) Ltd. Versus Province of Sindh & Others (CP No. 5220-2017 & Others).