M/S Pakistan Mobile Communication Ltd Vs Appellate Tribunal for Sales Tax on Services, Khyber Pakhtunkhwa, Peshawar and others

JUDGMENT SHEET

PESHAWAR HIGH COURT, PESHAWAR

JUDICIAL DEPARTMENT

Sales Tax Reference No.58-P/2022 with 57-P/2022 with CM No.68-P/2026

M/s Pakistan Mobile Communication Limited Vs Appellate Tribunal for Sales Tax on Services, through its Chairman/Judicial Member Khyber Pakhtunkhwa, Peshawar and others

Date of hearing: 11.06.2026

Petitioners (by): Mr. Muhammad Usman Shoukat, Advocate

Respondents (by): Barrister Asad-ul-Mulk

JUDGMENT

SYED ARSHAD ALI, J.- By this consolidated judgment, we propose to decide Sales Tax References Nos.60-P, 61-P, 62-P, 63-P, 64-P, 65-P, 66-P and 67-P of 2022. All eight References arise out of the consolidated judgment dated 26.05.2022 passed by the worthy Appellate Tribunal for Sales Tax on Services, Khyber Pakhtunkhwa, Peshawar (“the Tribunal”) in eight connected appeals.

2.The applicants are cellular telecommunication operators. M/s Pakistan Mobile Communications Limited is the applicant in References Nos.60-P, 61-P, 63-P and 65-P of 2022; M/s CM Pak Limited is the applicant in References Nos.62-P and 64-P of 2022; and M/s Telenor Pakistan (Private) Limited is the applicant in References Nos.66-P and 67-P of 2022. Since the Tribunal decided the eight departmental appeals through single consolidated judgment, and since the references raise substantially common questions of law founded upon the

same statutory scheme and the same orders of the Honourable Supreme Court, they were heard together.

3.The controversy arises out from the claim of input tax adjustment made by the applicants during the period when collection of sales tax from cellular consumers had been suspended pursuant to the orders passed by the Honourable Supreme Court of Pakistan in Human Rights Case No.18877 of 2018, culminating in the judgment reported as PLD 2019 SC 645.

4.The principal question is whether the judicial suspension of collection of sales tax from consumers had the legal effect of converting cellular telecommunication services, otherwise falling within the taxable-service regime under the Khyber Pakhtunkhwa Finance Act, 2013 (“Act of 2013”), into exempt or non-taxable services, so as to disentitle the applicant from claiming adjustment of input tax under the statutory scheme.

5.The controversy, therefore, requires examination of the distinction between taxability, chargeability, collection and exemption, as well as the statutory conditions governing input tax adjustment.

Statutory Scheme Governing Sales Tax on Services

6.Before examining the departmental proceedings and the rival submissions, it is appropriate to notice the statutory framework applicable to the controversy. The Act of 2013 was enacted to provide for the levy, collection and administration of sales tax on services in the Province and to establish the Khyber Pakhtunkhwa Revenue Authority.

7.The Act of 2013 does not, however, levy sales tax upon every activity which may ordinarily be described as a "service". Section 2(48) gives the expression "service" a broad meaning, whereas Section 19 identifies the

category of services which constitute taxable services by reference, inter alia, to the Second Schedule and the prescribed statutory nexus.

8.Section 2(48) broadly defines "service" or "services" as anything which is not goods, or the provision of which is not a supply of goods, and includes the services specified in the First Schedule. The Explanation further makes it clear that a service does not cease to be a service merely because its rendering involves the use, supply or consumption of goods, whether such use or supply is essential or incidental.

9.The statutory distinction between a service and a taxable service is thus material. The former defines the general subject-matter of the legislation; the latter determines whether a particular service falls within the charging regime.

10.Section 22 defines "economic activity" in comprehensive terms and includes an activity carried on continuously, regularly or otherwise which involves, or is intended to involve, the provision of services to another person. The definition includes business, profession, calling, trade or undertaking and does not make continuity or profit an indispensable requirement.

11.Section 19 is central to the determination of taxability. Under Section 19(1), a service is a taxable service where it is listed in the Second Schedule, is provided by a registered person from his registered office or place of business in Khyber Pakhtunkhwa, and is provided in the course of an economic activity, including its commencement or termination. The statutory scheme also contains provisions dealing with services supplied by non-residents and with the territorial nexus of services.

12.The Second Schedule is, therefore, not merely descriptive. It identifies the services falling within the taxable net and prescribes the applicable rates and, in certain cases, restrictions upon input adjustment. The legislative scheme consequently requires the Court to examine the relevant entry in the Second Schedule before determining whether a service is taxable.

13.In the case of telecommunication services, the position is particularly clear. The Second Schedule, at the relevant time, expressly included telecommunication services, telephone services, fixed-line voice telephone services, wireless telephone services, cellular telephone services and wireless local-loop telephone services within the taxable regime.

14.Section 26(1) envisages the levy of tax, taxing event and measure of tax. It provides, in substance, that tax shall be charged, levied, collected and paid on the value of a taxable service at the rate specified in the Second Schedule. Thus, once the statutory conditions of taxability are fulfilled, the liability arises by operation of the charging provision.

15.Section 23 provides the measure for determination of the value of the taxable service upon which the tax is calculated. Section 28, on the other hand, deals separately with exemptions and authorizes exemption of a taxable service, class of services, person or class of persons, subject to the statutory conditions and approval prescribed therein.

16.The architecture of the Act of 2013 consequently makes a clear distinction between a service falling within the taxable net under Section 19, the charge imposed under Section 26, and an exemption granted under Section 28. The legal character of a taxable service

cannot ordinarily be altered merely by inference from the fact that collection of the tax has, for a particular period, been restrained.

Statutory Scheme of Input Tax Adjustment

17.The next aspect requiring consideration is Section 26(4), which constitutes the statutory basis for input tax adjustment. The provision entitles a person required to pay tax to deduct from the payable amount the tax already paid on the receipt of taxable services used exclusively in connection with taxable services provided by such person, subject to the possession of a true and valid tax invoice not older than six tax periods and subject further to any restriction or disallowance validly imposed by the Authority through notification in the official Gazette.

18.Section 26(4), therefore, does not create an unrestricted right to deduct every amount of tax suffered by a registered person. The claimant must satisfy the statutory conditions. There must be tax actually charged and paid on a taxable input service; the input must have the requisite nexus with taxable services provided by the claimant; the prescribed invoice must be available; the temporal limitation must be satisfied; and the input must not fall within a category in respect of which adjustment has validly been restricted or disallowed.

19.The word "exclusively" occurring in Section 26(4) is also significant. The statutory test is not merely whether an expenditure was incurred in the course of business. The claimant must establish the required nexus between the input service and the taxable services supplied by it.

20.The Act of 2013 further recognizes that the Authority may, by notification in the official Gazette,

disallow or restrict input adjustment in respect of a service or class of services. The Second Schedule also contains categories of taxable services which, at relevant times, were subject to specified rates without input adjustment. Thus, the right of input adjustment is a statutory entitlement operating within defined boundaries.

21.The present controversy must therefore be approached on the basis that payment of input tax is necessary but not, by itself, sufficient for adjustment. The applicant must establish that the statutory conditions of Section 26(4) are fulfilled. Conversely, however, the Department cannot deny an otherwise qualifying claim by introducing a condition which the statute does not contain.

Facts Giving Rise to the References

22.The applicants are public limited companies engaged in the business of providing cellular telecommunication services. During the relevant period, their services fell within the taxable-service regime under Section 19 read with the relevant entry of the Second Schedule.

23.The controversy has its genesis in Human Rights Case No.18877 of 2018 before the Honourable Supreme Court of Pakistan, concerning the levy and collection of various taxes and charges from cellular mobile subscribers. Vide interim order dated 11.06.2018, collection of the impugned taxes and charges was suspended. Subsequently, vide order dated 16.10.2018, the relief was extended to post-paid consumers. The proceedings ultimately culminated in the judgment reported as PLD 2019 SC 645. However, relevant to the

present controversy, we deem it appropriate to reproduce paragraph 13 of the said judgment.

“13. As regards the apprehension of the cellular telecom companies with regard to the recovery from them of the taxes for the period during which such recovery was suspended by this Court the learned law officers of the Federation and the provinces have not attributed any fault to the telecom companies. In any event the telecom companies had simply implemented the order of this Court. Therefore, it would be unfair and unjust to demand that the cellular telecom companies make good the loss of the said taxes.”

24.During the period affected by the aforesaid orders, the applicants continued their cellular telecommunication business and continued acquiring goods and services for their business operations. They also continued filing their sales tax returns. In the return for the tax period April 2019, the present applicant adjusted input tax.

25.A desk review of the applicants’ returns resulted in issuance of show cause notices by the Additional Collector, Headquarters, KPRA. The allegation was that the applicants had utilized input tax despite suspension of collection of sales tax on telecommunication services pursuant to the orders of the Honourable Supreme Court.

26.The Department's case was essentially that, since output sales tax was not collected during the relevant period, the telecommunication services had, for the purposes of the input tax mechanism, become non- taxable and, consequently, the corresponding input tax was inadmissible.

27.The applicants contested the notices and maintained that the Supreme Court had merely suspended collection of sales tax and had neither repealed nor suspended the charging provision nor granted any exemption under Section 28. It was further contended that the applicants remained engaged in the same taxable

economic activities and that the inputs continued to have the requisite statutory nexus with their telecommunication services.

Opinion of the Assessing Officer

28.The Additional Collector did not accept the applicants’ position and passed assessment orders under Section 40(1) read with Section 68 of the Act. The Assessing Officer held that Section 40 empowered the Authority to assess tax actually payable where a registered person had made short payment and that an inadmissible input tax adjustment resulted in short payment. Section 68 was also considered applicable to the recovery of the amount alleged to have remained unpaid.

29.The Assessing Officer acknowledged that the telecommunication services had not been expressly exempted and that no formal declaration had been made by the Authority declaring them non-taxable. Nevertheless, he concluded that because the applicant could not charge, collect and deposit sales tax from consumers during the suspension period, the charging provision had, for practical purposes, become inoperative and the services were consequently to be treated as "non- taxable".

30.The Assessing Officer further proceeded on the premise that sales tax was an indirect and shiftable tax and that, since the incidence had not been passed on to consumers, the applicants could not claim input tax when there was no corresponding output tax. Consequently, the respective amounts claimed as input tax in the individual cases were treated as recoverable, along with penalty and default surcharge.

31.It is of considerable significance that the assessment orders themselves did not identify any amendment to Section 19 or Section 26, deletion of cellular services from the Second Schedule, or exemption notification under Section 28. The conclusion of non- taxability was derived entirely from the judicial suspension of collection.

Submissions of Learned Counsel for the Applicants

32.Learned counsel for the applicants contends that the entire impugned demand rests upon a fundamental misconception, namely, that suspension of collection amounted to exemption or non-taxability. It is submitted that telecommunication services continued to fall within Section 19 and the relevant entry of the Second Schedule; that Section 26 continued to constitute the charging provision; and that no exemption was granted under Section 28. Learned counsel has further argued that the Supreme Court's order operated upon collection from consumers and did not amend the provincial fiscal statute. The judicial restraint upon collection, therefore, could not be converted into a legislative alteration of the character of the underlying service.

33.The learned counsel for the Revenue has emphasized that input tax adjustment is a statutory concession and should be strictly construed to the extent provided by the statute itself. In support of his contention, he has placed reliance upon India Agencies (Regd.) Bangalore, vs. Additional Commissioner of Commerical Taxes, Bangalore (AIR 2005 SC 1594), Jayam & Co. vs. Assistant Commissioner and another (AIR 2016 SC 4443), Godrej & Boyce Mfg. Co. Pvt. Ltd. and others etc. vs. Commissioner of Sales Tax and others, etc. (AIR 1992 SC 2078), ALD Automotive Pvt. Ltd. vs. Commercial Tax Officer Now Upgraded As the

Assistant Commissioner (CT) and others (AIR 2018 SC 5235), Collector of Customs, Sales Tax and Central Excise etc. vs. M/s. Sanghar Sugar Mills Ltd., Karachi etc. (PTCL 2007 CL 565), The Commissioner, Inland Revenue, Karachi vs. Messrs Attock Cement Pakistan Limited, Karachi (2023 SCMR 279).

Points for Determination

34.From the pleadings, record and submissions, the controversy may conveniently be considered under the following questions:

(i)Whether suspension of collection of sales tax pursuant to the orders passed by the Honourable Supreme Court in Human Rights Case No.18877 of 2018 converted the applicant's cellular telecommunication services into exempt or non- taxable services;

(ii)whether absence of actual collection of output tax during the suspension period, by itself, rendered otherwise qualifying input tax inadmissible; and

(iii)whether the statutory conditions of Section 26(4) were satisfied or could be rejected merely on the basis of non-collection of output tax.

Chargeability, collection and exemption are distinct concepts

35.The first principle which requires emphasis is that chargeability, collection and exemption are legally distinct concepts. Mr. Munib Akhtar, J., has very elaborately delineated the concept that, in taxing statutes, there are three stages: firstly, the imposition or creation of the very tax or the levy known as the charge. The charging section, in the ordinary parlance, connotes the subject of tax. Next is the quantification of the tax levy, which is called assessment, in other words, the measure of tax, and thirdly, the recovery of the tax levy which is normally called collection. The former is the charging

section which connotes the subject of the taxing statute while the latter two are the machinery provisions contained in the machinery section of the statute1.

36.A charging provision determines whether a taxable event attracts tax. The mechanism of collection concerns the manner and stage at which the tax is recovered. Exemption, on the other hand, constitutes a statutory departure from the ordinary charging regime and must derive from the authority conferred by the legislature.

37.Under the statutory scheme applicable to the applicant, telecommunication services were expressly brought within the taxable-service regime. Section 19 identified the taxable service; the Second Schedule specified the relevant service and rate; and Section 26 imposed the charge. Section 28 separately provided the mechanism for exemption. Thus, where a taxable service was intended to be exempted, the statute contemplated an affirmative exercise of the power of exemption. The Department has not identified any notification under Section 28 exempting cellular telecommunication services during the relevant period. Nor has any amendment to Section 19, Section 26 or the relevant entry of the Second Schedule been identified.

38.In these circumstances, the conclusion that the service became "non-taxable for all legal purposes" merely because its collection had been judicially restrained cannot be accepted. The practical suspension of collection did not, without more, alter the statutory classification of the service.

1.H,M. Extraction Ghee and Oil Industries (Pvt.) Ltd. and another vs. Federal Board of Revenue and another, reported as 2019 SCMR 1081.

39.There is no cavil with the proposition advanced by the learned counsel for the Revenue. The input adjustment is a statutory concession and should be strictly construed to the extent allowed by the Statute itself. However, even if Section 26 is construed strictly on the principle emphasized by the learned counsel, the adjustment of input tax can only be denied when the statutory requirements for such adjustment are not fulfilled or where the Authority has validly restricted or disallowed such adjustment through a notification issued in the official Gazette. If the Authority had intended to restrict disallow the said input tax adjustment upon suspension of collection of tax by the Apex Court, it could have issued an appropriate notification in terms of Section 26(4).

40.The significance of the Supreme Court’s judgment in Human Rights Case No.18877 of 2018, for the present controversy, lies in its recognition that the cellular companies could not fairly be required to make good taxes which had not been collected because such collection had been restrained by the Court itself.

41.That proposition cannot, however, be expanded into a finding that the underlying telecommunication service had ceased to be a taxable service under the provincial legislation.

42.There is a fundamental difference between saying that tax cannot be collected from the consumer pursuant to a judicial order and saying that the service itself no longer falls within the charging provision.

43.The former concerns collection; the latter concerns taxability. The latter cannot be inferred merely from the former unless the judicial order or the statute expressly produces such consequence.

44.The Supreme Court did not, in the context under consideration, repeal Section 19 or Section 26 of the provincial statute, delete cellular services from the Second Schedule, or grant an exemption under Section 28. The departmental interpretation would consequently attribute to the judicial order a legislative consequence which is not apparent from the judgment itself.

Input tax and its statutory nexus

45.The next question is whether the absence of output tax collection during the suspension period, by itself, destroyed the applicants’ statutory entitlement to input tax adjustment.

46.Section 26(4) supplies the answer by prescribing the conditions for adjustment. The provision requires, amongst other things, that the input tax have been paid on the receipt of taxable services and that such services have been used exclusively in connection with taxable services provided by the claimant, supported by a true and valid tax invoice within the prescribed period.

47.Thus, the statutory inquiry is directed primarily towards the nature of the input, the payment of tax thereon, the documentary requirements and its nexus with taxable output services.

48.The statute does not expressly introduce an additional condition that input tax becomes inadmissible merely because, owing to an order of a Court, the taxpayer was temporarily prevented from collecting output tax from its customers.

49.The distinction is important. Had the applicants diverted the relevant inputs to an exempt activity or to a purpose having no nexus with taxable services, Section 26(4) would operate differently. Likewise, if the

Department established that the tax shown on the invoices had not actually been charged or paid, the claim could fail on that statutory ground.

50.A similar scheme of input tax adjustment exists under the federal law, namely, the Sales Tax Act, 1990 (“Act of 1990”). Although the scheme under the Act of 1990 is more explicit and elaborate, the principle that input tax can only be adjusted in respect of taxable supplies is, to the relevant extent, pari materia with Section 26(4). Section 8 of the Act of 1990 specifies broad categories in respect of which input tax adjustment cannot be claimed.

51.The Honourable Supreme Court was confronted with a somewhat similar issue in the case of Messrs Mayfair2. The issue before the Honourable Supreme Court was whether the taxpayer could claim adjustment of input tax in respect of goods which were subsequently damaged and, therefore, were not consumed in any taxable activities. While examining the scheme of input tax adjustment, the Honourable Supreme Court observed in paragraph 11 as follows:

“11. Upon a more introspective review of section 7 of the Sales Tax Act, we note that it provides a registered person with the opportunity to adjust input tax at the stage of determining his tax liability, particularly in respect of taxable supplies made during the tax period. For a registered person to avail himself of the beneficial adjustment of input tax against output tax, section 7 as it was at the relevant time, mandates the following conditions:

Firstly, the input tax paid on purchases of inputs or raw materials must be intended for the purpose of making taxable supplies.

Secondly, the input tax paid must be for producing taxable supplies, irrespective of whether those taxable supplies have actually been made or are to be made in the future.

2.The Commissioner Inland Revenue, Legal Zone, Large Taxpayers Office, Lahore and another vs. Messrs Mayfair Spinning Mills Ltd. and others (2025 SCMR 1).

Thirdly, the input tax paid in a tax period is to be deducted from the output tax due for the same tax period and not against any future tax period.”

52.The principle emerging from the aforesaid judgment is that, where input tax is claimed, the claimant must demonstrate that the goods or services were acquired for use in connection with taxable supplies. The mere fact that the Apex Court restrained collection of tax from further provision of the service does not, by itself, take the service outside the remit of taxable services. This principle assumes particular significance in the present case, where the applicants’ telecommunications infrastructure, equipment and other business inputs continued to be acquired and utilized for their ongoing telecommunication activity.

53.Indeed, the applicants continued their business during the relevant period and the relevant infrastructure continued to be employed in the provision of telecommunication services. Once collection was restored, the same business infrastructure continued to support services falling within the taxable regime. The temporary judicial restraint upon collection, therefore, cannot retrospectively alter the purpose for which the inputs were acquired or destroy their statutory nexus with the applicant's taxable business.

54.In the present case, the substantive foundation of the demand is that the applicants’ telecommunication services became non-taxable during the suspension period. Since that premise is legally unsustainable, the consequential demand under Sections 40 and 68 cannot survive to that extent.

55.In nutshell, the value-added tax mechanism ordinarily contemplates a relationship between input and output tax. The present case, however, involves an

exceptional circumstance: the absence of output tax collection was not the result of a voluntary decision by the applicant but followed from the orders passed by the Honourable Supreme Court. The applicants’ telecommunication activity continued throughout the relevant period. The service remained within the statutory description of taxable services. No exemption under Section 28 has been shown; no deletion from the Second Schedule has been demonstrated; and no amendment of the charging provision has been identified.

56.The statutory entitlement to input adjustment remains subject to the conditions prescribed by Section 26(4). The applicant must, therefore, satisfy the requirements concerning actual payment of input tax, exclusive nexus with taxable services, possession of a true and valid tax invoice, the prescribed temporal limitation and any applicable statutory or notified restriction.

57.The assessment orders, the order of the Collector (Appeals) dated 15.04.2021, and the consolidated judgment of the worthy Tribunal dated 26.05.2022, to the extent they disallow the applicant's claim of input tax adjustment on the aforesaid premise, therefore, cannot be sustained.

58.The Sales Tax References Nos.60-P, 61-P, 62-P, 63-P, 64-P, 65-P, 66-P and 67-P of 2022 are accordingly answered in the affirmative in favour of the applicants, to the extent of the questions concerning the legal effect of the judicial suspension of collection upon the taxability of cellular telecommunication services and the consequential denial of input tax merely on account of non-collection of output tax during that period. The impugned consolidated judgment dated 26.05.2022

passed by the worthy Tribunal is set aside. A copy of this judgment be sent to the worthy Tribunal in terms of Section 71(5) of the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022.

JUDGE

JUDGE

Date of Announcement of Judgment........ 06.10.2026

D.B Hon’ble Mr. Justice Syed Arshad Ali & Hon’ble Mr. Justice Kamran Hayat Miankhel Mahmood Shah, PS