2023 PLP (Trib (PTD)

ZAHID SIKANDAR, JUDICIAL MEMBER.

Through this appeal, the department inter alia has challenged order dated 19.11.2015 passed by Commissioner Inland Revenue (Appeals-I), Lahore whereby the CIR(A) deleted tax imposed for non-deduction of tax under section 233 and non-deduction of tax on account of Director's fee.

2. Briefly the factual matrix giving rise to the present appeal is that proceedings under section 161/205 were initiated and finalized ex-parte by the OIR vide order dated 20.03.2015 and tax liability of Rs.1,495,736,611/- was created against the taxpayer observing different discrepancies. Appeal was filed by the appellant and the CIR(A) vide order dated 30.04.2015 remanded back the matter to the assessing officer for de novo consideration with a direction to finalize proceedings after giving adequate opportunity of hearing to the taxpayer. As per directions of the CIR(A) matter was taken up again by the assessing officer. Different issues were confronted against which reply was filed however, the assessing officer finalized re-assessment proceedings by observing default of taxpayer in non-deduction of tax in respect of certain payments and framed order under sections 124/161/205 in the following manner: S.No. Head of account/issued involved Tax charged under sections 124/122A / 161/205 1 Default under the head rent under section 155 2,440,691

2. Default under the head commission under section 233 3,427,567

3. Default under the head salaries under section 149 18,600 Total tax charged under section 161 5,886,858 Default surcharge under section 205 3,178,903 Total tax charged under sections 124/122A/161/205 9,065,761

3. Again, the taxpayer assailed the order before the first appellate authority. The CIR(A) deleted tax liability of Rs.3,427,567/- and Rs.18,600/- for default under the head 'commission' under section 233 and under the head 'salaries' respectively. Whereas rest of issues were disposed of by the CIR(A) with certain directions to the assessing officer. The department has agitated against the impugned order passed by CIR(A) to the extent of deletion of tax imposed under the heads of 'Commission' and 'Director's fee' by way of filing the instant appeal.

4. Mr. Muhammad Zeeshan DR assisted the bench on behalf of the appellant department. On the other hand, Mr. Asim Zulfiqar Ali, FCA turned up to represent the respondent assesse. We have heard arguments of the learned representatives of rival parties at length and have also perused impugned order with their able assistance. Our issue wise findings are as under: Default under the Head 'Commission' under section 233:

5. During the adjudication proceedings break up of commission paid during the tax year under review was provided by the taxpayer. Record suggests that taxpayer paid total commission amounting to Rs.1,071,296,000/- out of which payments of Rs.177,942,000/- was made outside Pakistan. The taxpayer also withheld tax on payments aggregating to Rs.859,078,335/-. In support thereof, the taxpayer provided all the documentary evidence to the assessing officer which was accepted and no adverse inference was drawn against such payments. In respect of remaining amount of Rs.34,275,665/-, it was asserted by the taxpayer that these payments represented discounts and inter-company account settlement hence, no tax was required to be withheld. The assessing officer turned down the contentions regarding non-deduction of tax by observing that deduction under section 233 was required even payments were made through book adjustments to co-insurers/parties. Accordingly, the assessing officer created tax liability of Rs.3,427,567/- for default of non-deduction on commission payments.

6. The CIR(A) set aside the impugned tax demand by taking a different view that since the taxpayer made inter-company transactions and matter also pertained to tax year prior to the insertion of section 158(c) vide Finance Act, 2015 and Rule 43B(d) through SRO 958(I)/2015 dated 29.09.2015, therefore withholding of tax was not required on payments of commission to co-insurers. The main controversy has arisen out due to a different understanding of the nature of transactions involved by department and the taxpayer. The learned AR submitted that in insurance business it is a normal course of procedure that two or more insurer companies by creating a consortium jointly insure a particular thing against which the companies divide premium amount according to the settlement and one principal lead insurer company pays the amount of commission in total and also withhold tax accordingly. Further submits that in the instant case by arrangement/agreement between the lead insurer and the appellant/co-insurer, Insurance Policies had been provided to the clients/insured on receipt of the premium and the premium so received has been proportionately shared by the co-insurer and the lead insurer in accordance with the risk covered by each one of them. As per the agreement between the insurers, the lead insurer is required to collect the entire amount of insurance premium. The liability of compliance of deduction of withholding tax under section 233 is on the lead insurer. The learned AR indicated that the entire amount of premium was received and distributed to co-insurer and the liability of deduction/deposit of withholding tax has been discharged. Advance tax having been collected/paid on the entire payment of commission, therefore cannot be held liable to recovery from the appellant company as the transaction involved cannot be taxed twice. The appellant being co-insurer shared the payment of commission paid by the lead insurer company and adjusted the payment of commission through book adjustments and inter-company transactions therefore are reflecting in the accounts of the company. The learned AR emphasized that this is one transaction in total against which lead insurer company duly withheld and deposit withholding tax and the appellant being co-insurer is not liable to withhold tax again on the same transaction against which the lead insurer company has already deducted/deposited tax. Lastly submits that no payment has escaped taxation as complete proof of deduction of tax by the lead insurer company against the payments involved is available with the respondent.

7. Conversely, the learned DR reiterated the findings of the assessing officer and contested the matter by submitting that payment/commission made by lead insurer company to the agent and payment/commission made by co-insurer to the principle company sharing the amount/cost of commission are to be treated as two different transactions and under the law every payment on commission requires deduction under section

233. Adds that since each insurance company is a party to the agreement and have rendered services separately, the liability to comply with the withholding provisions is on each one of the co-insurer and the taxpayer even being co-insurer was liable to withhold tax on account of payments made under the Head of commission and the CIR(A) was not justified to delete tax liability under this Head.

8. Before we dilate upon the issue, it is imperative to reproduce section 233 of Income Tax Ordinance, 2001 which reads as under:

233. Brokerage and Commission.- (1) Where any payment on account of brokerage of commission is made by the Federal Government, a Provincial Government, a [Local Government], a company or an [association of person or individual having turnover of hundred million rupees or more] (hereinafter called the "principal") to a [ ] person (hereinafter called the "agent"), the principal shall deduct advance tax at the rate specified in [Davison II of] Part IV of the First Schedule from such payment. (2,) . (3.) .

9. The above section envisages that where any company makes payment on account of brokerage and commission to another person (agent), the principle (company) shall deduct advance tax at the rate specified. In the instant case the respondent company has not made payment directly to the commission agent rather it was paid by lead insurer company and the respondent being co-insurer shared the cost of commission through book adjustments and internal account settlement. One of the reason given by the CIR(A) to delete the tax imposed under this head is that provisions of section 158(c) and SRO 958(I)/2015 was introduced subsequent to the period of transactions under question. In our view that was unnecessary as the adjudication officer nowhere referred the impugned action under any of these provisions rather simply the assessing officer created tax liability on account of non-deduction under section

233. It has already been explained that section 233 deals with payments made by principle (company) to commission agents and the instant case certainly does not squarely fall under this provision.

10. Normally, insurance services are provided by a number of insurance companies jointly by creating a consortium under an agreement to the client/insured. The premium is collected from the insured by the lead insurer and allocated among the insurance companies proportionate to their undertaking of the risk. It is the duty of the lead insurer company to ensure the discharge of deduction of advance tax against the payments made to the commission agent. We further observe that there is no separate transaction/payment between the lead insurer and the co-insurer for the purpose of collection of advance tax under section

233. Insurance premium is received in full by the lead insurer and after payment taxes/deductions on the entire amount, the rest is distributed among the co-insurer on the basis of their agreed shares. The co-insurers and their shares of risk are decided through agreement. The co-insurance agreement is only in the nature of general regulation for sharing the risk and premium involved in an insurance policy and the entire insurance premium as well as payment to commission agent has already suffered tax at the time of its receipt/payment in the hands of the lead insurer. If there is any non-deduction on the payment made to agent, the lead insurer may be inquired but not the co-insurers who have not made any payment directly to the commission agents. In the instant case, tax liability was created by the assessing officer on a defective understanding of the subject which has rightly been deleted by the CIR(A). However, it is directed that the department shall verify the factum of payment of withholding tax by the lead/co-insurers on the disputed transactions and in case any non-deduction is found, proceedings be initiated against the lead insurers in accordance with law. The respondent taxpayer shall provide all the necessary details regarding payment, lead insurers and transactions.

11. With the above narrated observations and directions, the order passed by CIR(A) is upheld on this issue and the appeal of the department is disposed of. Default under the Head 'salaries (Director's fee):

12. During the tax year under review, the taxpayer paid salaries aggregating to Rs.763,175,000/-. The taxpayer submitted reconciliation to the OIR which was found in order except payments on account of Director's fee to the tune of Rs.310,000/-. Accordingly, the OIR taxed the said amount @6% at Rs.18,600/-. It was held by the assessing officer that the said payments are in nature of services and tax deduction was applicable under section 153(1)(b). The CIR(A) deleted the same by observing that the fee paid to directors has been made liable to withholding tax vide Finance Act, 2014 through insertion of subsection (3) of section 149 whereas the instant matter pertains to tax year 2013.

13. Under the existing provisions of the Income Tax Ordinance at the relevant time (tax year 2013), a company, being an employer, is required to deduct tax at the time of payment of salary to its employees. However, there is no specific provision for deduction of tax on the remuneration paid to a director which is not in the nature of salary. The director has not provided any technical or professional services to the assessee and therefore payment of sitting fees does not constitute payment for rendering services under section 153(1)(b). Had it been included in section 153(1)(b), there was no need of insertion of subsection (3) in section 149 specifically providing the deduction of tax at the time of payment made for directorship fee. The amendment brought in tax year 2014 relating to deduction of tax on director's fee in section 149 is prospective and does not apply in the instant case. Hence, the CIR(A) rightly deleted the tax under this head. The appeal of the department on this issue fails.

14. With the above narrated reasons and observations, the titled appeal filed at the behest of the department is dismissed. MQ/68/Tax (Trib) Appeal dismissed.