Business premises established in FATA: SC explains how immunity from taxation under ITO can be claimed

ISLAMABAD: The Supreme Court held that immunity from the payment of taxation under the Income Tax Ordinance of 2001 shall not be claimed merely on the basis that the business premises have been established in FATA.

“Rather the onus was on the taxpayer to establish the fact that taxable income was not being derived from the area where the statute was enforced and applicable,” it added.

A three-judge bench, headed by Justice Sardar Tariq Masood, and comprising Justice Syed Mansoor Ali, and Justice AtharMinallah declared this on an appeal of chief commissioner Peshawar.

Fata, Pata units: No extension in tax exemptions beyond 30th

The judgment noted that Section 156A of the Income Tax Ordinance, 2001, makes it a mandatory obligation of the person selling the petroleum product to a petrol pump operator to deduct tax from the amount of the commission or discount allowed by the latter at the rate specified in Division VI of Part-III of the First Schedule. This deduction is in the nature of a final tax regime since Sub-section 2 of Section 156A declares it to be the final tax.

In the cases before the apex court, the companies selling the petroleum products to the respondents had deducted the tax from the amount of commission paid to or discount allowed by the latter. The respondents, engaged in the business of purchase of petroleum products and its subsequent sale to the retail consumers, filed applications for refund of the amount deducted as tax under 156A of the Ordinance of 2001 solely on the ground that the enforcement of the Ordinance of 2001 was not extended to the territorial limits of FATA in accordance with law and the constitutional mandate expressly provided under Article 247 (3) of the constitution.

The court noted that it is not disputed that the President had not directed that the Ordinance of 2001 shall apply to FATA.

The applications filed under Section 170 of the Ordinance were dismissed by the taxation officer on the basis of a letter dated 23-11-2011 issued by the then Central Board of Revenue. He further held that the provisions of the Ordinance were attracted because of the payments having been made by the respondents in the settled/ taxable areas.

The respondents filed the appeals before the Commissioner Inland Revenue (Appeal), who allowed them on the ground that the business was being carried on in an area where the Ordinance of 2001 did not apply.

The department challenged the orders before the Appellate Tribunal Inland Revenue, which were dismissed. It then approached the High Court that answered the question of law against the department.

The Court noted that Section 156A of the Ordinance provides that every person selling petroleum product to a petrol pump operator shall deduct tax from the amount of commission or discount allowed to the operator at the rates specified in Division VI A of Part III of the First Schedule. The tax deductible under sub-section shall be a final tax on the income arising from the sale of petroleum products.

It also noted that the obligation of deduction of tax is on the person selling the petroleum products to the operator of the petrol pump, while the said deduction is relatable to the commission paid to or discount allowed by the latter.

The factum of income having been accrued was on account of the commission paid to the respondents for the sale of petroleum products and not the sale of petroleum products to the consumers at the petrol pumps operated in FATA.

As already noted the deduction of tax fell under the final tax regime. Admittedly, the contractual arrangement for the sale of petroleum products, the actual sale and payment, as well as, deduction of the tax had taken effect in the areas of Pakistan outside the territorial limits of FATA and, therefore, the transactions and the income arising from such sale were not immune from the enforcement of the provisions of the Ordinance of 2001.

The income derived by the respondents was on account of commission paid to them by the seller companies outside FATA.

The judgment said that this crucial factum could not be successfully established by the respondents and their refund claims were, therefore, justifiably rejected by the taxation officer. It appears that the appellate authorities, as well as the High Court, were not correctly assisted regarding the scope and nature of the deduction of tax under section 156A of the Ordinance of 2001.

It also appears from the record that the taxation officer had received photocopies of applications from the respondents claiming refunds under section 170 of the Ordinance. The contractual arrangement between the companies selling the petroleum products to the respondents was not properly disclosed by the respondents. Nonetheless, the claims of refund of the tax deducted under Section 156A of the Ordinance was not tenable and, therefore, rightly rejected.

Copyright Business Recorder, 2024