Brokerage and commission

2023 PTD 1628 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.233, 158(c), 161 & 205Brokerage and CommissionAdvance tax, deduction ofInsurance companies, business ofCollection of premiumPrincipal and agent, relationship of

Commissioner Appeals deleted the liability under the commission under S. 233 of Income Tax Ordinance, 2001, imposed by the Assessing Officer

Plea of the appellant / Department was that S.233 of Income Tax Ordinance, 2001, envisaged that where any company made payment on account of brokerage and commission to another person (agent), the Principle (Company) would deduct advance tax at the rate specified

Validity

Record revealed that the respondent/company had 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

Insurance services were, normally, provided by a number of insurance companies jointly by creating a consortium under an agreement to the client / insured

Premium is collected from the insured by the lead Insurer and allocated among the Insurance Companies proportionate to their understanding 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

There is no separate transaction / payment between the lead Insurer and the Co-insurer for the purpose of collection of advance tax under S.233 of the Ordinance, 2001

Insurance premium is received in full by the lead Insurer ;and after payment of taxes / deductions on the entire amount, the rest is distributed among the Co-insurer on the basis of alleged shares

Co-insures and their shares of risk are decided through agreement

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 was any non-deduction on the payment made to Agent, the lead Insurer might be inquired but not the Co-insurer who had not made any payment directly to the Commission Agent

Tax liability, in the present case, was created by the Assessing Officer on a defective understanding of the subject which had rightly been deleted by the Commissioner Appeals

Tribunal directed the Appellant/Department to verify the factum of payment of withholding tax by the lead/Co-insurer on the disputed transactions and in case any non-deduction was found, proceedings be initiated against the lead Insurer in accordance with law

Tribunal further directed that the respondent shall provide all the necessary details regarding payment, lead Insurers and transactions

Commissioner Appeals had rightly deleted the tax-in-question

Tribunal upheld the impugned orders for having been passed in accordance with law

Appeal filed by the appellant (Department) was dismissed, in circumstances.

2012 PTD 316 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 233Brokerage and commissionFinal discharge of tax liabilityCommission or brokerage retained by the commission agent was to be treated as paid by the principal

Subsection (1) of S.233 of the Income Tax Ordinance, 2001 deals with the deduction of tax whereas subsection (2) of S.233 of the Income Tax Ordinance, 2001 pertains to the collection of tax

Taxpayer contended that sub-section (1) in subsection (3) of S.233 of the Income Tax Ordinance, 2001 made it abundantly clear that it was only the tax deducted by the principal from the amount of commission or brokerage paid to the franchise/agency holder under subsection (1) of S.233 of the Income Tax Ordinance, 2001 which could be treated as final discharge of tax liability whereas the amount of commission falling under subsection (2) of S.233 of the Income Tax Ordinance, 2001 stood excluded from the domain of Presumptive Tax Regime

Validity

Under subsection (2) of S.233 of the Income Tax Ordinance, 2001, the amount of commission or brokerage retained by the commission agent was also deemed to be a payment made by the principal who had also been made responsible for collection of tax

Nature and character of the amount mentioned in subsection (2) of S.233 of the Income Tax Ordinance, 2001, was also to be treated alike as that of the amount mentioned in subsection (1) of S.233 of the Income Tax Ordinance, 2001 i.e. it was also to be treated as paid by the principal

By fiction of law, the entire amount mentioned in subsection (2) of S.233 of the Income Tax Ordinance, 2001 became part and parcel of the amount mentioned in sub-section (1) of S.233 of the Income Tax Ordinance, 1979 and consequently taxable in the same manner as the amount mentioned in S.233(1) of the Income Tax Ordinance, 2001.

2012 PTD 316 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.233(3)Brokerage and commissionFinal taxTax deducted and collected

Section 233(3) of the Income Tax Ordinance, 2001 provided that the tax collected from a person under subsection (1) of S.233 of the Income Tax Ordinance, 2001 shall be the final tax on the income of the person from whom the tax was collected

Withholding provisions of the Income Tax Ordinance, 2001 made it evident that the words "deducted" and "collected" had been used to cover two different situations in the context of the provisions of S.233 of the Income Tax Ordinance, 2001

In case of "deduction" it was the withholding agent who was the payer as well as deducting authority whereas in the other situation it was the recipient (Collector) of the amount who, acting as a withholding agent collects the amount of tax from the payer; in the first type various government authorities who, while making payments in consideration of supplies, services or execution of contracts deduct tax at the rates specified in law while in the case of "Collection" e.g. Collector of Customs who at the time of clearance of imported goods also collects income tax from the importer.

2012 PTD 316 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S.233Brokerage and commission"Commission"Connotation

Relationship which governs the conduct of business was that of the principal and agent and the amount paid by the principal to the agent in consideration of the services rendered by the later either on the basis of fixed percentage or performance was to be treated as "commission".