PAKISTAN STATE OIL LTD. VS COMMISSIONER OF INCOME TAX, KARACHI, 2018 PTD-SUPREME-COURT 1306 (2018)

(Against the judgment dated 17.11.2006 of the High Court of Sindh, Karachi, passed in I.T.As. Nos. 60 and 61 of 1999)

Income Tax Ordinance (XXXI of 1979) [since repealed]---

----S. 80C--- Presumptive tax/deemed income tax--- Oil products imported by the Federal Government through Pakistan State Oil ("PSO") as its Handling Agent---Commission on handling charges was paid to PSO for the assessment year in question and income tax was duly paid on the said amount by PSO---Assessing officer dealing with the case took a different view of the matter, and focused on the fact that all the documents in the case pertaining to the purchase and import of the cargo were in the name of PSO; that the Letters of Credit were opened by PSO in its own name and the oil was also cleared by it, and that Bills of Entry were also prepared in the name of PSO---Assessing officer concluded that PSO was the actual importer of the oil products hence it was liable to pay deemed income tax in terms of S. 80C of the Income Tax Ordinance, 1979; held, that oil was admittedly purchased by the Federal Government and it was also imported by the Government---Contract for the purchase of the oil was entered into directly by the Federal Government with the foreign seller---One of the clauses of the contract for import of oil products clearly provided that the title in the oil products would pass to the Federal Government on the happening of either one of two events, whichever was earlier; first, was upon receipt and acceptance by the Federal Government of the documentation of title and the second was "just prior to entry of the vessel into the territorial waters of Pakistan."---Since title passed to the Federal Government prior to the entry of the vessel into the territorial waters of Pakistan it necessarily followed that the import was made by the Federal Government---Pakistan State Oil ("PSO") had no role to play at such stage---Fact that the Bills of Entry and other import documents were subsequently executed by PSO was not really relevant---Furthermore on a commission (income) of Rs.45,643,000 the tax demand created on PSO under S. 80C of the Income Tax Act, 1979 was Rs.469,806,560, which was about ten times more than the actual income---Tax could be levied up to, or below, the total income, but if the levy, exceeded 100 percent of the income it prima facie amounted to a confiscation of the property of the assesse since he had to meet it from his other unrelated assets, if any---While some allowance could be made to deal with cases of tax evasion (and the present was obviously not such a case), it was on the face of it, unjustifiable to create a tax demand which was ten times more than the total income received as had been done in the present case---No tax was payable by PSO under S. 80C of the Income Tax Ordinance, 1979---Appeal was allowed accordingly.

Khalid Anwar, Senior Advocate Supreme Court for Appellant (in both cases).

Mrs. Misbah Gulnar Sharif, Advocate Supreme Court for Respondent (in both cases).

Date of hearing: 3rd January, 2018.

JUDGMENT

MIAN SAQIB NISAR, C.J.---These appeals with the leave of the Court dated 7.3.2007 to consider that the appellant (in both appeals) was not liable to pay presumptive tax under section 80C of the Income Tax Ordinance, 1979 (the Ordinance of 1979) as it was not an importer rather a mere agent of the Government of Pakistan.

2.The facts of the case are striking. The Appellant Company, namely, Pakistan State Oil Ltd. ("PSO") is a company incorporated under the Companies Ordinance, 1984, the majority of whose shares are owned by the Government of Pakistan. It is also managed by the Government of Pakistan. The dispute pertains to the Assessment Year 1996-97 and the succeeding assessment year. The backdrop to the dispute is provided by a contract dated 9.7.1995 entered into between the President of Pakistan and Glencore International AG, a Swiss company, pertaining to the supply of refined petroleum products. The Seller is thus the Swiss company and the Buyer is the President of Pakistan. The Contract provides that delivery is to be made on C&F basis at Karachi. The salient features of the contract, insofar as relevant, are set out below.

(i)Clause-III bears the heading "Title and Risk", and sub-clause (a) reads as follows:

(a)The cargo shall be at Buyer's risk once it passes the flange connecting the shore pipelines with the vessel intake pipes/belt and title and property in the products comprised in each cargo shall pass to the Buyer upon receipt of an acceptance by the Buyer of documents of title, or just prior to entry of the vessel into the territorial waters of Pakistan, whichever is sooner.

(ii)In terms of Clause VI payment was to be made through irrevocable Letters of Credit established by the Buyer.

(iii)Clause X of the Contract bears the title "Taxes and duties". It is reproduced below:

(a)All duties, taxes, levies and other charges on the vessel shall be borne by the Seller;

(b)All duties and other fiscal levies on the cargo subsequent to entry into Pakistan territorial waters shall be borne by the Buyer. Any other duties, taxes, imports or charges on cargo at load port or wherever shall be to the account of Seller.

3.The Government of Pakistan by means of a letter dated 18.7.1992 appointed PSO as Handling Agent for all matters pertaining to the import of oil products. In terms of paragraph 2 of the said letter it was stated that 0.15% of the C&F cost of the oil products shall be paid by the Government to PSO for handling the cargo. The letter further provided that all other charges such as license fee, LC charges, insurance etc. would also be paid by the Government to PSO. Subsequently, the Government also issued a formal certificate to PSO certifying that it was acting as Handling Agent to handle imports of POL products at Keamari and Fotco on behalf of the Ministry of Petroleum and Natural Resources, Government of Pakistan.

4.The dispute between the parties occurred in the following circumstances. The commission on handling charges paid to PSO for the assessment year in question amounted to Rs.45,643,000/- and income tax was duly paid on the said amount by the Company. The assessing officer dealing with the case, namely, the Inspecting Additional Commissioner of Income Tax Range-III, however, took a different view of the matter. He focused on the fact that all the documents in the case pertaining to the purchase and import of the cargo were in the name of PSO. In particular, he noted that the L/Cs were opened by PSO in its own name and the oil was also cleared by it. The Bills of Entry were also prepared in the name of the Company. He also claimed that the sales of the POL products were effected by the Company. Against this backdrop he considered that section 80C of the Ordinance of 1979 was applicable. The said section pertains to deemed income of importers and contractors and, insofar as relevant, is reproduced below; along with section 50(5) which too is material.

"50(5) Notwithstanding anything contained in any law for the time being in force,-

(a)the Collector of Customs shall, in the case of every importer of goods, collect advance tax computed, on the basis of the value of such goods as increased by the customs duty and sales tax, if any leveled thereon, at the rates specified in the first Schedule, and credit for the tax so collected in any financial year shall, subject to the provisions of section 53, be given in computing the tax payable by such importer for the assessment year commencing on the first day of July next following the said financial year, or in the case of an assessee to whom section 72 or section 81 applies, the assessment year, in which the "said date", as referred to therein, falls, whichever is the later;

(b)the tax under clause (a) shall be collected in the same manner and at the same time as the customs duty, as if such goods (even though exempt from such duty) were liable to such duty, and all the, provisions of the Customs Act, 1969 (IV of 1969) shall, so far as may be, apply accordingly."

80C. Tax on Income of certain contractors and Importers.---(1) Notwithstanding anything contained in this Ordinance or any other law for the time being in force, where any amount referred to in subsection (2) is received by or accrues or arises or is deemed to accrue or arise to any person the whole of such amount shall be deemed to be income of the said person and tax thereon shall be charged at the rate specified in the First Schedule.

(2)The amount referred to in subsection (1) shall be the following, namely:--

(a)Where the person is a resident.--

(i) the amount representing payments on which tax is deductible under subsection (4) of section 50, other than payments on account of services rendered.

(ia) the amount representing payments from which tax is deductible under subsection (5A) of section 50;

(ii) the amount as computed for purpose of collection of tax under subsection (5) of section 50 in respect of goods imported, not being goods imported by an industrial undertaking as raw material for its own consumption."

5.In brief, he came to the conclusion that PSO was the importer of the oil products and hence was liable to pay deemed income tax in terms of section 80C. He did not dispute the fact that the POL products had been purchased by the Government of Pakistan but he attached greater importance to the fact that the import documentation was in the name of the Company. He accordingly created the enormous tax demand of Rs.469,806,560/- on the Company under section 80C. On the face of it, the demand was surprising, to say the least. On an income of Rs.45,643,000/- the tax demand created was over ten times as much.

6.The Company disputed the demand in appeal before the Commissioner of Income Tax, Appeals-V, Karachi, unsuccessfully. A further appeal to the Income Tax Appellate Tribunal however succeeded. The appeal was decided by means of a consolidated order for the assessment year 1996-97 and the succeeding year 1997-98.

7.It will be noted that in terms of section 50(5) the jurisdiction to deduct tax vests in the Customs Authorities. The Customs Authorities however did not deduct income tax presumably on the basis that the owner of the POL products was the Government of Pakistan which, of course, was not liable to pay income tax. The appellate order narrates the fact that a perusal of the correspondence indicate that the company's consistent stance was that the imports had been made by the Government of Pakistan pursuant to the contract entered into between it and the Swiss company, the Seller. Pursuant to the import of each cargo of POL products, as per the structure laid down by the Government, the oil was put in bond and thereafter cleared by three different oil marketing companies including PSO. The other two companies are Shell Pakistan Ltd. and CALTEX. The Company further pointed out that the Government appointed procedure contemplated an allocation of foreign exchange by the Ministry of Finance for the import of the POL products which was sent to the State Bank of Pakistan in terms of which L.Cs were opened by the Company on behalf of the Government.

8.The assessing officer gave a rather convoluted explanation to explain away the fact that PSO had been appointed as handling agent and was paid a commission in terms thereof on which admittedly income tax was paid by it. His view was that "PSO is working as controlling instruments in the field of marketing of petroleum products of the Government. Thus the claim of the assessing company that it is not indulged in the imports [sic] is contrary to the real facts."

9.This was certainly a rather startling conclusion. From being merely a handling agent which was being paid a commission of 0.15% PSO has been transformed into a controlling instrument in the field of marketing of petroleum products and held liable to pay deemed income tax on the entire value of the oil products imported pursuant to the Contract with the Swiss Company. It is this which led to the astronomical demand on the Company.

10.The Tribunal summarized the facts relating to the purchase and imports of the oil and thereafter noted the following, in terms of paragraph 9 of the said order which is reproduced below:

"On perusal of all the above documents we asked the assessing officer to explain as to how the appellant was appointed agent by Government of Pakistan if the appellant was himself an importer. After being confronted with the contract for import of POL products and the contents of letter dated 18.7.1992 reproduced in the assessment order [i.e. the letter appointing PSO as handling agent], the learned Assessing Officer had no option but to concede that PSO merely acted as agent to the Government of Pakistan for handling the contract and was paid commission at the fixed rate for performing various services."

11.In the above circumstances, the Tribunal came to the conclusion that the assessing officer and the Commissioner of Income Tax Appeals, had erred by holding that PSO was the importer of the POL products and held that it was actually the Government of Pakistan which had imported the POL products and PSO had merely acted as a handling agent. Thus the appeal succeeded and it was held that no tax was payable under section 80C of the Ordinance of 1979.

12.After having conceded before the Tribunal, as recorded above, that PSO had merely acted as an agent on behalf of the Government of Pakistan it is rather surprising to note that he thereafter proceeded to file an appeal before the High Court of Sindh. Even more surprisingly, the appeal succeeded before a division bench of the High Court and hence the present appeal.

13.The High Court was not impressed by the reasoning of the Tribunal and laid great stress on the fact that the documentation pertaining to imports was in the name of PSO. It stated that "without disputing the factual position that the imports were made by the Respondent (i.e. PSO) on behalf of the Government of Pakistan, we are of the opinion that if the Tribunal held the view that the provisions of section 80C will not apply to person who made the imports on his own but as handling agent of some other person they should have discussed the relevant law and pointed out the provisions under which they had taken that view. In the absence of such an exercise just on the appreciation of a partial factual position the action of the Tribunal cannot be sustained."

14.With respect, we are unable to agree either with the criticism, or the conclusion derived therefrom. The criticism was uncalled for and the finding was erroneous. Both the facts and the law are clear beyond any reasonable doubt. The owner and importer of the oil was the Government of Pakistan. This is the base line fact from which everything else flows. The oil was admittedly purchased by the Government of Pakistan and it was also imported by the Government. It will be recollected that the contract for the purchase of the oil was entered into directly by the Government of Pakistan with the Seller. PSO was nowhere in the picture at that point of time. Furthermore, Clause-III of the Contract leaves no doubt on the critical point as to who was the importer of the oil. It points out that the title in the oil products would pass to the Government of Pakistan on the happening of either one of two events, whichever was earlier. The first was upon receipt and acceptance by the Government of Pakistan of the documentation of title and the second was "just prior to entry of the vessel into the territorial waters of Pakistan." Since title passed to the Government of Pakistan prior to the entry of the vessel into the territorial waters of Pakistan it necessarily follows that the import was made by the Government of Pakistan. PSO had no role to play at that stage. Thus the fact that the Bills of Entry and other import documents were subsequently executed by PSO is not really relevant. The essential facts were not disputed by the assessing officer, namely, that the cargo was purchased and acquired by the Government of Pakistan. Thus, to treat PSO as, for all practical purposes, as the owner and importer is a wholly unjustifiable inference drawn by the assessing officer as well as by the High Court of Sindh.

15.There is ample case law which indicates that the concept of import into Pakistan pertains to the physical bringing in of the goods in question and not in terms of the procedural documentation required for declaring and clearing the goods through Customs. In the case of Pakistan Textile Mills Owners Association Karachi v. Administrator of Karachi (PLD 1963 SC 137) it was held by this Court that "import and export in their ordinary and natural sense mean to bring into, or to take out of or away from a particular place." Similarly in the case of East and West Steamship Company v. Collector of Customs (PLD 1976 SC 618) it was held by this court as follows:

"The word "import" carries the natural meaning of bringing in and has no technical meaning. Mr. A.K. Brohi construed the word import as entailing the entire process of filing bill of entry, discharging from the vessel at the wharf, assessment of value of the goods and the duty payable on them. We, however, see no warrant for placing this artificial meaning on the word "import". (Page 263).

Similarly, the Lahore High Court in the case of the Lahore Textile and General Mills Ltd. v. Collector of Customs (PLD 1988 Lahore 563) observed that "in these circumstances, no sooner a ship enters the territorial waters of the customs port of Karachi, goods can be stated to be imported into Pakistan, irrespective of the fact whether the vessel touches the land mass of Pakistan or discharges the cargo on the wharf (page 572)."

16.In the case of Master Foam v. Government of Pakistan (2005 PTD 1537 SC) it was held by this Court that "from the above it is clear that right from 1963 till date the courts in Pakistan have consistently given the word "import" its natural and ordinary meaning of bringing into the country and have rejected the imposition of artificial constraint on it, such as those imposed by the American Doctrine of original package (Pages 1555-1556)."

17.In the above circumstances we fail to understand what further clarification, or discussion, was required in order to arrive at a conclusion which seems to be fairly obvious. Both the facts, and the law, are clear.

18.There are two other aspects of the matter which require a brief consideration:

(i)As pointed out in the above, the procedure laid down by the Government contemplated that the oil products in questions would be cleared not by PSO alone but also by Shell as well as CALTEX. The assessing officer had, by means of separate proceedings, also held SHELL Pakistan to be an importer by virtue of the fact that it had cleared the oil from customs and thereafter sold it. This decision was challenged by Shell Pakistan Ltd. successfully before the Tribunal. The Department thereafter took it up before the Sindh High Court. The Sindh High Court summarily dismissed the challenge by means of a judgment dated 8.2.2002 in terms of which the following question of law, which is reproduced below, was decided against the department.

"(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that it was the GoP which was importer of POL product and the assessee (Shell) is not an importer?"

The finding of the High Court was that this question was a question of fact and therefore could not be re-examined in appeal. This judgment was also placed before the learned division bench of the court without any success. The learned division bench distinguished the case on the ground that the Shell role was limited to clearing the goods from Customs. While this is no doubt correct it is also correct that the whole dispute was held to be a question of fact and the fact that was in focus was whether the Government was, or was not, the importer of the oil. The Tribunal had categorically held that the Government was the importer and this finding was not upset in appeal and thus remained binding. This was perhaps a binding precedent.

(ii)The second aspect of the matter pertains to the concept of deemed income. As noted earlier section 80C creates a concept of deemed income for, and in relation to, imports. The manner in which this question has been discussed, and disposed of, by the High Court gives rise to an important question of constitutional law. In terms of the said judgment an amount of approximately Rs.45 million actually received by PSO as commission was held to lead to a deemed income tax demand which was ten times more than the total amount received by the Company. This conclusion is ex facie very startling. While there is no doubt about the legislative power to create a deeming concept for, and in relation to, income tax there is also little doubt about the fact that there are limits to the concept of deemed income. In this context, it would not be out of place to refer to the well-known judgment of this court in the case of Elahi Cotton Mills Ltd. v. Federation of Pakistan (PLD 1997 SC 582) in terms of which the following principles were laid down:-

(xxii) That any legislation whereby either the prices of marketable commodities are fixed in such a way as to bring them below the cost of production and thereby make it impossible for a citizen to carry on his business or tax is imposed to such a way so as to result in acquiring property of those on whom the incidence of taxation fell, then such legislation would be violative of the fundamental rights to carry on business and to hold property as guaranteed in the Constitution.

(xxiii) That the taxing power is unlimited as long as it does not amount to confiscation and that the Legislature does not have the power to tax to the point of confiscation.

(xxxii) That the rule of interpretation that while interpreting an entry in a Legislative List it should be given widest possible meaning does not mean that Parliament can choose to tax as income as item which in no rational sense can be regarded as a citizen's income. The item taxed should rationally be capable of being considered as the income of a citizen.

The principle of law is clear on the constitutional plane. Entry 47 of the 4th Schedule to the Constitution authorizes the levy of tax on income other than agricultural income. This implies theoretically that tax can be levied upto, or below, the total income. If the levy, exceeds 100 percent of the income it prima facie amounts to a confiscation of the property of the assessee since he has to meet it from his other unrelated assets, if any. While some allowance can be made to deal with cases of tax evasion (and the present is obviously not such a case), it is on the face of it, unjustifiable to create a tax demand which is ten times more than the total income received as has been done in the present case.

19.In the above circumstances, the present appeals are allowed and the impugned judgment of the learned High Court is set aside and that of the Income Tax Appellate Tribunal dated 23.12.1998 is restored.

MWA/P-2/SC Appeals allowed.