PTA VS FBR etc

JUDGMENT SHEET

ISLAMABAD HIGH COURT, ISLAMABAD

JUDICIAL DEPARTMENT

1. WRIT PETITION NO. 2398 OF 2021

PAKISTAN TELECOMMUNICATION AUTHORITY THROUGH ITS DIRECTOR BUDGET

& ACCOUNTS

VERSUS

FEDERAL BOARD OF REVENUE THROUGH ITS CHAIRMAN AND OTHERS

2. WRIT PETITION NO. 1570 OF 2020

PAKISTAN TELECOMMUNICATION AUTHORITY THROUGH ITS DIRECTOR GENERAL

LAW & REGULATION

VERSUS

FEDERAL BOARD OF REVENUE THROUGH ITS CHAIRMAN AND OTHERS

3. WRIT PETITION NO. 1572 OF 2020

PAKISTAN TELECOMMUNICATION AUTHORITY THROUGH ITS DIRECTOR GENERAL

LAW & REGULATION

VERSUS

FEDERAL BOARD OF REVENUE THROUGH ITS CHAIRMAN AND OTHERS

4. WRIT PETITION NO. 2433 OF 2021

PAKISTAN TELECOMMUNICATION AUTHORITY THROUGH ITS DIRECTOR BUDGET

& ACCOUNTS

VERSUS

FEDERAL BOARD OF REVENUE THROUGH ITS CHAIRMAN AND OTHERS

5. WRIT PETITION NO. 3877 OF 2021

PAKISTAN TELECOMMUNICATION AUTHORITY THROUGH ITS DIRECTOR BUDGET

& ACCOUNTS

VERSUS

FEDERAL BOARD OF REVENUE THROUGH ITS CHAIRMAN AND OTHERS

6. WRIT PETITION NO. 652 OF 2024

PAKISTAN TELECOMMUNICATION AUTHORITY THROUGH ITS DIRECTOR BUDGET

& ACCOUNTS

VERSUS

FEDERAL BOARD OF REVENUE THROUGH ITS CHAIRMAN AND OTHERS

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Petitioners by: Mr. Umer Khan Verdag, Advocate.

Mr. Osama Shahid, Advocate in writ petition no.

Respondents by: 2433/2021 and. Malik Qamar Afzal, Advocate in all remaining writ petitions.

Muhammad Yahya Khan Niazi, Judicial Law

ASSISTED BY:

Clerk.

DATE OF

HEARING:

INAAM AMEEN MINHAS, J:- This common judgment shall decide the afore-titled writ petitions, as they involve similar questions of law and facts.

2.In writ petition no. 2398/2021, the petitioner has impugned Show Cause Notice dated 25.06.2021 wherein federal excise duty (“FED”) to the tune of Rs. 14,696,979,107/- and penalty amount of Rs. 734,848,955/- has been demanded from the petitioner. The petitioner has also sought a declaration that respondent no. 1/ Federal Board of Revenue (“Department”) has no authority to demand or levy any amount. Additionally, the petitioner has sought a direction that the Ministry of Finance to act in accordance with the Rules of Business, 1973 as the Department is bound by the legal opinion of the Ministry of Law and Justice until its parent department i.e. the Finance Division has resolved the issue through a reference to the cabinet.

3.Apart from the declaration and direction sought above the petitioner in writ petition no. 1570/2020, has impugned Show Cause Notice dated 18.05.2020 wherein FED to the tune of Rs. 1,246,820,802/- and penalty has been demanded from the petitioner and the petitioner has also impugned the vires of para 4 of the Section 49 of the Income Tax Ordinance, 2001 (“ITO

4.In writ petition no. 1572/2020, the petitioner has impugned Show Cause Notice dated 18.05.2020 wherein FED to the tune of Rs. 53,239,038/- and penalty has been demanded from the petitioner. The petitioner has also sought

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the same direction and declaration sought in writ petition no. 2398/2021 and has also impugned the vires as assailed in writ petition no. 1570/2020.

5.In writ petition no. 2433/2021, the petitioner has impugned Show Cause Notice dated 25.06.2021 wherein FED to the tune of Rs.106,269,698/- and penalty has been demanded from the petitioner. The petitioner has also sought the same direction and declaration sought in writ petition no.2398/2021.

6.In writ petition no. 3877/2021, the petitioner has impugned Show Cause Notice dated 04.10.2021 wherein penalty of Rs.39,5000/- has been imposed from the petitioner. The petitioner has also sought the same direction and declaration sought in writ petition no. 2398/2021.

7.In writ petition no. 652/2024, the petitioner has impugned Show Cause Notice dated 16.02.2024 wherein federal excise duty to the tune of Rs.10,040,440,615/-and penalty has been demanded from the petitioner. The petitioner has also sought the same direction and declaration sought in writ petition no.2398/2021.

8.Learned counsel for the petitioner Authority contended that the petitioner does not render any services which may attract the levy of FED under the Federal Excise Act, 2005 nor does the petitioner Authority fall within the scope of the definitions provided under the said Act, as its role is confined to the regulation of the establishment, operation, and maintenance of telecommunication systems, as well as the oversight of telecommunication services provided by licensed operators in Pakistan. Learned counsel further submitted that under the Pakistan Telecommunication (Re-organization) Act, 1996 (“PTRA 1996”), no function has been assigned to the petitioner Authority for the provision of telecommunication services to any person. It was also argued that the respondent, Department has erroneously construed Section 4(a) of the PTRA 1996 by equating the issuance of licenses under the statutory and regulatory framework with franchise arrangements, thereby treating the licensees of the petitioner Authority as “franchisees.” Such an interpretation, it was contended, is wholly misconceived. Lastly, the learned counsel submitted that the Department lacks jurisdiction to impose or demand FED on the

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regulatory functions of the petitioner Authority, rendering the impugned notice without lawful authority, arbitrary, and liable to be declared ultra vires.

9.Conversely, Malik Qamar Afzal, Advocate learned counsel appearing on behalf of the Federal Board of Revenue/respondent Department, submitted that under Section 4(a) of the PTRA 1996, the petitioner Authority enjoys exclusive authority in respect of the provision of telecommunication services in Pakistan. It was argued that telecommunication services are licensed to various operators under agreements executed against payment of prescribed fees, thereby establishing, according to the respondents, a franchisor–franchisee relationship between the petitioner Authority and its licensees. Learned counsel further contended that a plain reading of Section 4(a) indicates that the petitioner Authority is engaged not only in regulation but also in the commercial domain through the grant and management of spectrum licenses. The transfer of rights to provide telecommunication services to operators in consideration of fees, it was argued, constitutes a contractual arrangement akin to franchising, thus attracting the levy of FED. On this premise, it was urged that the petition is not maintainable and is liable to be dismissed with costs.

10.Mr. Osama Shahid, Advocate appearing for the respondent in writ petition no. 2433/2021 raised preliminary objection to the maintainability of the petition. It was contended, first, that the petition is premature as the petitioners do not qualify as “aggrieved parties” within the contemplation of Article 199 of the Constitution. It was submitted that this statutory appellate framework ultimately culminates before the High Court, and any attempt to bypass it undermines the legislative intent and the constitutional separation of powers. Learned counsel while placing reliance on M/s Pakistan Oilfields Ltd. vs. FOP etc, (2020 PTD 110), PKP Exploration Limited vs. FBR etc, (2021 PTD 1644) and CIR etc. vs. Jahangir Khan Tareen etc., (2022 SCMR 92) submitted that this Court should not exercise writ jurisdiction in a manner that circumvents the statutory adjudicatory hierarchy. Lastly, allegations of mala fides were pressed, asserting that the petitioner has approached this Court with unclean hands.

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11.We have given anxious consideration to the arguments of the learned counsel for the parties and perused the record with their able assistance.

12.Briefly recapitulated the petitioner Authority has called in question the legality and validity of the Impugned Show Cause Notices whereby FED along with penalty, has been sought to be imposed on account of licenses issued to various providers of telecommunication systems and telecommunication services operating in Pakistan. Before adverting to the discussion, we would like, for reference and for ease of access, to reproduce hereunder the relevant portions of impugned notice:- “Whereas, it has been observed that M/s Pakistan Telecommunication Authority (PTA) having Sales Tax Registration No. 2600263492210 and NTN 2634922-1 located at Headquarter, F-5/1, Islamabad, is receiving payments on account of licenses issued to various operations of telecommunications system in Pakistan in the exclusive domain of M/s PTA. Examination of record available in the office shows that during review of available information M/s PTA has not paid Federal Excise Duty on account of Franchise Service rendered to its licensees / franchisees contrary to the provisions of section 3 of the Federal Excise Act, 2005 read with table II of the First Schedule of the Act. Review of financial statements of different cellular Companies also confirmed that they made payments to M/s PTA on account of franchise services in the shape of license fee, royalty or Technical Service Fee.

2.The Federal Government levied Federal Excise Duty @ 10% of charges on “Franchise Service, Royalty or Technical Service Fee” in terms of section 3 read with serial 11 of Table II of the First Schedule to Federal Excise Act, 2005. Section 3 of the Federal Excise Act, 2005 provides: “Subject to the provision of this Act and Rules made there under, there shall be levied and collected in such manner as may be prescribed duties of excise on—

(a).....................................................

(b).....................................................

(c).....................................................

(d)Service provided in Pakistan including the services originated outside but rendered in Pakistan.

At the rate of “fifteen” percent advalorem except the goods and services specified in the First Schedule, which shall be charged to Federal Excise Duty as, and at the rates, set forth therein.”

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3.Moreover, the word “Franchiser” has been defined under sub- rule (mb) of Rule 2 of the Federal Excise Rules, 2005 and “Franchise” under sub-section (12a) of section 2 of the Federal Excise Act, 2005 as under:- “Franchiser” means any person who enters into franchise and includes any associate of franchiser to enter into franchise on his behalf, and the term “franchisee” shall be construed accordingly.

“franchise” means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved.”

4.The Hon’ble Appellate Tribunal Inland Revenue, Islamabad in its consolidated judgment dated 13-08-2015, in appeals No. FEA No.26/IB/2012 and FEA No.27/IB/2012 filed by M/s PTA against the issue of chargeability of FED on Royalty, held that “M/s PTA in respect of Royalty for representing it in the field of Telecom section is clearly chargeable to duty in terms of Section 3(1)(d) of the Federal Excise Act, 2005 read with Rule 43A of the Federal Excise Rules, 2005 further read with Federal Excise General Order No. 05/2006 dated 05-08-2006”.

5.The function of the M/s PTA is described under clause (a) of section 4 of the Pakistan Telecommunication (Re-organization) Act, 1996, (herein after referred as Act) as to regulate the establishment, operation and maintenance of telecommunication systems and the provision of telecommunication services in Pakistan. Whereas, M/s PTA has conferred its rights to licensees under section 20 of the Act to establish, maintain or operate any telecommunication system or provide any telecommunication service on payment of prescribed fee. It is provided as under;-

20.Licensing of telecommunication services. —(1) No person shall establish, maintain or operate any telecommunication system or provide any telecommunication service unless he has obtained a license under this Act.

6.These provisions clearly provide that M/s PTA has a sole authority for the provision of telecommunication services in Pakistan and the provisions of telecom services were licensed to telecom operators under various agreements against payment of prescribed fee. It is thus established that M/s PTA being Franchiser authorizes its licensees as Franchisees to render the

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telecom services that are specifically identified with the M/s PTA under clause (a) of section 4 of the Act.”

13.While considering this background and the grounds raised by the parties, following questions need adjudication by this Court:-

(i)Whether the petitioner Authority, discharging purely regulatory functions under the PTRA 1996, can be characterized as a “franchiser” within the meaning of the Federal Excise Act, 2005, and whether the issuance of licenses to telecom operators against prescribed fees constitutes a commercial franchise arrangement attracting Federal Excise Duty thereunder?

(ii)Whether the petitioner Authority qualifies for exemption from taxation under Article 165 of the Constitution of Pakistan, being a limb of the State?

14.This Court shall now address the first question framed. The petitioner Authority was established pursuant to the promulgation of the PTRA 1996 by Parliament. Prior to the enactment of this statute, there existed no functional segregation between the roles of a regulator and those of a service provider in the field of telecommunication and allied services. The preamble of the PTRA 1996 is reproduced as under:- “An Act to provide for re-organization of telecommunication System WHEREAS it is expedient to provide for re-organization of telecommunication system in Pakistan by establishing the Pakistan Telecommunication Authority, the Frequency Allocation Board, National Telecommunication Corporation and the Pakistan Telecommunication Employees Trust, regulation of telecommunication industry, transfer of telecommunication services to private sector and for matter connected therewith or incidental thereto;”

15.A plain reading of the preamble of the PTRA 1996 makes it evident that the petitioner Authority was established as a statutory regulatory body for the purpose of reorganizing and regulating the telecommunication system in Pakistan. The legislative intent, as reflected in the said preamble, clearly envisages the petitioner as an authority entrusted with oversight, licensing, and governance of the telecom sector, including facilitating its transition to the private domain. The core functions of the petitioner authority are set out in Section 4 of the PTRA 1996 which is as under:-

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“4. Functions of the Authority.— (1) The Authority shall—

(a)regulate the establishment, operation and maintenance of telecommunication systems and the provision of telecommunication services in Pakistan;

(b)receive and expeditiously dispose of applications for the use of radio-frequency spectrum;

(c)promote and protect the interests of users of telecommunication services in Pakistan;

(d)promote the availability of a wide range of high quality, efficient, cost effective and competitive telecommunication services throughout Pakistan;

(e)promote rapid modernization of telecommunication systems and telecommunication services;

(f)investigate and adjudicate on complaints and other claims made against licensees arising out of alleged contraventions of the provisions of this Act, the rules made and licences issued thereunder and take action accordingly;

(g)make recommendations to the Federal Government on policies with respect to international telecommunications, provision of support for participation in international meetings and agreements to be executed in relation to the routing of international traffic and accounting settlements;

(h)perform such other functions as the Federal Government may, from time to time, assign to it

(i)regulate arrangements amongst telecommunication service providers of sharing their revenue derived from provision of telecommunication service;

(j)ensure effective compliance by licensees with Universal Services Obligations;

(k)regulate Access Promotion Contribution;

(l)settle disputes between licensees; and

(m)regulate competition in the telecommunication sector and protect consumer rights.”

16.A closer and purposive examination of the functions assigned to the PTRA 1996 under Section 4 of the Act reveals that the Authority operates entirely within the regulatory domain, supervision, and governance, as opposed to any form of commercial service provision. Clause (a) of Section 4, which empowers the petitioner Authority to regulate the establishment, operation, and maintenance of telecommunication systems, is a clear manifestation of sovereign regulatory authority. The power to “regulate” inherently implies control, supervision, and standard-setting over entities operating within the telecom sector, rather than direct involvement in the provision of services.

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Through this clause, the petitioner Authority exercises oversight to ensure that telecommunication infrastructure is developed and operated in accordance with law, technical standards, and public interest considerations. Such functions are quintessentially governmental in nature, as they involve licensing, compliance enforcement, and systemic governance. At no point does this clause envisage the petitioner Authority as a market participant or a provider of telecommunication services, rather, it positions the petitioner Authority above the market as a watchdog and regulator.

17.Moreover, a contextual and purposive interpretation of the clause makes it abundantly clear that the said expression does not attribute the function of providing telecommunication services to the petitioner Authority, rather, it delineates the scope of regulatory control exercised by the Authority over other entities that are engaged in the provision of such services. The operative word in the clause is “regulate,” which governs both “the establishment, operation and maintenance of telecommunication systems” and “the provision of telecommunication services.” Thus, the petitioner Authority’s role is confined to supervising and controlling how such services are provided by licensed operators, not to provide those services itself. It is a settled principle of statutory interpretation that provisions must be read as a whole, and words cannot be isolated to distort legislative intent. If the interpretation advanced by the respondent Department is accepted, it would lead to an absurd conclusion whereby the regulator itself becomes a service provider, thereby collapsing the fundamental distinction between regulator and regulate, which is the cornerstone of modern regulatory frameworks. The PTRA 1996, read in its entirety including its preamble and Section 4 consistently positions the petitioner Authority as an oversight body and not a commercial entity. Therefore, the mere presence of the phrase “provision of telecommunication services” within a regulatory clause cannot be stretched to re-characterize the petitioner Authority’s statutory functions as taxable services.

18.Further, a deep analysis of Clauses (b), (d), and (e), relating to spectrum management, promotion of modern and efficient services, and sectoral development, demonstrate a policy-driven and facilitative role, aimed at

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creating an enabling environment for private service providers rather than competing with them. These clauses place the petitioner Authority in the role of a catalyst for sectoral growth, ensuring that the industry evolves in a competitive and technologically advanced environment under proper regulatory oversight. In the same vein, clauses (c), (j), and (m) further highlight the petitioner Authority’s role as a guardian of public interest. The obligation to protect consumer rights, ensure compliance with universal service obligations, and regulate competition reflects the essential characteristics of an independent regulator entrusted with maintaining fairness, transparency, and efficiency within the telecom sector. Such responsibilities are regulatory and supervisory in character, aimed at balancing the interests of stakeholders and ensuring orderly market conduct. They do not involve any element of commercial exchange or quid pro quo that could be construed as rendering a taxable service. Therefore, these provisions, when read harmoniously, leave no room for doubt that the functions of the Authority are strictly statutory and regulatory.

19.It is an undisputed position that the petitioner Authority does not, in law or in fact, provide any telecommunication services. The definition of “telecommunication service” as contained in Section 2(v) of the PTRA 1996 is to be read in the context of the regulatory domain of the petitioner Authority, delineating the scope of activities subject to its oversight, rather than conferring upon it the role of a service provider. Section 2(v) of the PTRA 1996 is reproduced as under:- “"Telecommunication service" means a service consisting in the emission, conveyance, switching or reception of any intelligence within, or into, or from, Pakistan by any electrical, electromagnetic, electronic, optical or optio-electronic system, whether or not the intelligence is subjected to re-arrangement, computation or any other process in the course of the service.”

20.In contrast, the charging provisions under the Federal Excise regime, particularly Section 3(d) read with Section 2(23) of the Federal Excise Act, 2005, clearly envisage the levy of duty upon services that are actually rendered, as specified in the First Schedule read with Chapter 98 of the Pakistan Customs Act. Telecommunication services, as classified under heading 98.12, are thus

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taxable only when they are provided in a commercial sense by entities engaged in the business of supplying such services to consumers or end-users. The statutory scheme, therefore, presupposes the existence of a provider–recipient relationship, involving the furnishing of services in consideration of payment. Tested against this legal framework, the position of the petitioner Authority stands on an entirely different footing. The petitioner Authority neither renders any of the telecommunication services enumerated under heading 98.12 to telecom operators, licensees, or the general public, nor does it operate or manage telecommunication systems in a commercial capacity. Its role is confined to issuing licenses, allocating spectrum, and ensuring regulatory compliance, all of which are performed under a statutory mandate on behalf of the Federal Government. These functions are inherently regulatory and supervisory, lacking the essential attributes of service provision as contemplated under the Federal Excise law. Indeed, the definition of “services” under Section 2(23) of the Federal Excise Act, 2005, when read in conjunction with the First Schedule, reinforces this conclusion, as it limits the scope of taxable services to those facilities, utilities, or services which are actually provided and are leviable to duty under the Act. The activities of the petitioner Authority do not fall within this ambit, as they do not originate from a commercial undertaking nor culminate in the delivery of services to any recipient. Accordingly, it becomes evident that the attempt by the respondent Department to impose FED upon the petitioner Authority is premised on a fundamental mischaracterization of its statutory functions. The petitioner Authority, being neither a provider of telecommunication services nor capable of rendering such services under its governing statute, cannot be brought within the charging provisions of the Federal Excise Act. Consequently, the impugned assumption of jurisdiction by the respondents is legally unsustainable and liable to be struck down.

21.This must also be examined from lens that a clear conceptual distinction and demarcation exists between a “regulator” and a “service provider”. The term “regulator” has been defined in the various dictionaries in the following terms:-

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i)The Cambridge Advanced Learner’s Dictionary & Thesaurus defines it as:- “Regulator: a device used to control things such as the speed of a clock, the temperature in a room, etc. An official who makes certain that the companies who operate a system, such as the national electricity supply, work effectively and fairly”

ii)The Cambridge Academic Content Dictionary defines it as:- “A person or organization whose job is to control an activity or process and make certain that it operates as it should:

Federal regulators prepare to set stricter rules for cars and fuel.”

iii)Similarly, in the Merriam-Webster Dictionary, the term “regulator” is defined as follows:- “an official who works for the part of the government that controls a public activity (such as banking or insurance) by making and enforcing rules i.e., federal/ state regulators”

iv)Further, in the Oxford Advanced American Dictionary, the term “regulator” is explained in the following manner:- “a person or an organization that officially controls an area of business or industry and makes sure that it is operating fairly i.e., a gas industry regulator, banking regulators, etc.”

v)The Collins Advanced Learner’s Dictionary elaborates the term “regulator” as under:- “A regulator is a person or organization appointed by a government to regulate an area of activity such as banking or industry, such as Congress is investigating why it took so long for government regulators to shut the plant down.”

vi)Collins further explains the word regulator as:- “A person or thing that regulates; the mechanism, including the hairspring and the balance wheel, by which the speed of a timepiece is regulated; a timepiece, known to be accurate, by which others are timed and regulated; any of various mechanisms or devices, such as a governor

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valve, for controlling fluid flow, pressure, temperature, voltage, etc.”

vii)Likewise, the term “service provider,” as defined in authoritative dictionaries, conveys an entirely different legal and functional connotation. The Oxford Advanced American Dictionary defines it as:- “A business company that provides a service to customers, especially one that connects customers to the Internet.”

viii)While the Collins Advanced Learner’s Dictionary explains it as:- “A company that provides a service, especially an internet service.”

22.These authoritative definitions, when read collectively, clearly demonstrate that a “regulator” is not an entity engaged in commercial dealings or the provision of services, but rather one entrusted with the functions of control, supervision, enforcement, and governance over a particular sector or activity. As reflected in the Cambridge, Merriam-Webster, Oxford, and Collins dictionaries, the consistent emphasis is on regulating conduct, ensuring adherence to prescribed rules, maintaining fairness, and overseeing the proper functioning of industries and public systems. In essence, the role of a regulator is to lay down standards, monitor compliance, and enforce discipline, so as to ensure that the sector operates in an orderly, efficient, and lawful manner. On the other hand, a “service provider” operates within the realm of commercial exchange, offering services directly to consumers or end-users. Its activities are inherently transactional and typically involve a voluntary relationship based on consideration, where services are rendered in return for payment or benefit. This fundamental distinction highlights that while a service provider participates in the market as a supplier, a regulator stands apart from the market as a supervisory authority. The functions of a regulatory body are thus compulsory, statutory, and governance-oriented, which stand in sharp contrast to the voluntary, profit-driven, and customer-oriented activities of a service provider. In view of these authoritative definitions, if Section 4 of the PTRA 1996 is examined once again, it becomes abundantly clear that the Pakistan Telecommunication Authority is functioning strictly in the capacity of a

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regulator, and not as a service provider to end users. The functions enumerated therein; such as regulating the establishment and operation of telecommunication systems, managing spectrum, issuing licenses, ensuring compliance, protecting consumer interests, resolving disputes, and promoting fair competition; are all indicative of oversight, control, and governance of the telecom sector. These functions align squarely with the dictionary meanings of a regulator, which emphasize supervision, rule-making, and enforcement, rather than participation in commercial activity.

23.We shall now address the second part of the first question framed i.e. whether the issuance of licenses against prescribed fees amount to a commercial franchise arrangement attracting FED? At this stage, it is appropriate to examine paragraph 5 of the Impugned Notice (reproduced in paragraph 12 above), wherein reliance has been placed upon clause (a) of Section 4 of the PTRA 1996 to assert that the petitioner Authority regulates the establishment, operation, and maintenance of telecommunication systems as well as the provision of telecommunication services in Pakistan. Whereas, under Section 20 of the Act, the Authority has “conferred its rights” upon licensees to establish, maintain, or operate telecommunication systems or to provide telecommunication services upon payment of prescribed fees. The respondent Department have equated the grant of a statutory license with a commercial franchise arrangement and, on that basis, have sought to bring the petitioner Authority within the ambit of paying FED. Their stance proceeds on the understanding that the issuance of licenses against payment of prescribed fee amounts to a conferral of rights by the Authority upon its licensees, thereby creating a franchiser–franchisee relationship.

24.The reliance placed by the learned counsel for the respondents on section 20 of the PTRA 1996, to contend that the petitioner authority has “conferred its rights” upon licensees, is based on a fundamental mischaracterization of the statutory scheme and the nature of licensing powers. The application of the expression “conferred its rights” is not only misconceived but also legally inaccurate. The petitioner Authority does not possess any proprietary or commercial “right” to provide telecommunication services which it may

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transfer or assign to others, rather, it exercises a statutory regulatory power to grant permission to eligible entities to operate within a controlled legal framework. Section 20 of the PTRA 1996, when read in its proper context, does not envisage the transfer of any right belonging to the Authority. Instead, it imposes a statutory prohibition, whereby no person can establish, maintain, or operate a telecommunication system or provide telecommunication services unless duly licensed. The issuance of a license, therefore, is not a conveyance of the petitioner Authority’s own rights, but a regulatory authorization permitting the licensee to undertake activities which are otherwise restricted by law. The source of the right to provide telecommunication services flows from the statute itself, not from the petitioner Authority as a commercial entity. To accept the respondents’ contention would lead to the erroneous conclusion that every statutory license issued by a regulatory authority, whether in telecommunications, energy, transport, or trade amounts to a transfer of rights akin to a commercial arrangement, which is neither supported by law nor consistent with established principles of administrative jurisprudence. In reality, the petitioner authority merely acts as a gatekeeping authority, ensuring that only qualified and compliant entities are permitted to operate in the telecom sector, while retaining full regulatory oversight.

25.A careful reading of the definition of “franchise” reveals that it necessarily involves the grant of a right to carry on a business activity identified with the franchiser, typically in a commercial setting where the franchiser’s brand, business model, or service is replicated or represented by the franchisee. The element of identification with the franchiser is not merely incidental but constitutes the very essence of a franchise arrangement. In the present cases, while the petitioner Authority does grant licenses to telecom operators, such licenses are issued strictly within a regulatory framework to ensure orderly functioning of the sector, and not for the purpose of enabling licensees to represent or act as extensions of the Authority in a commercial sense. The licensing mechanism under section 4(a) is a tool of regulation, not commercialization. It permits operators to independently establish and operate telecommunication services subject to compliance with statutory conditions. The licensees do not provide services on behalf of the Authority, nor are such

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services held out to the public as services of the Authority itself. There exists no element of branding, representation, or market identification linking the services of licensees with the petitioner Authority. In fact, the petitioner Authority remains structurally and functionally distinct from the operators it regulates, thereby negating any inference of a franchiser–franchisee relationship. Moreover, the mere payment of a licensing fee cannot be equated with consideration for a franchise since such fee is regulatory in nature, imposed under statutory authority for the grant of permission to operate within a controlled sector. It lacks the commercial character and mutuality that typify franchise arrangements. Accepting the respondent department’s interpretation would lead to an impermissible expansion of the concept of franchise, whereby every regulatory license, irrespective of its nature, would be brought within its ambit, a consequence neither intended by the legislature nor supported by the language of the law.

26.At this juncture it is appropriate to conduct a comparative analysis of internationally recognized principles governing franchise arrangements. In established commercial jurisprudence, a franchise necessarily involves the grant of rights to use the franchiser’s trademark, brand identity, and business system, coupled with a continuing commercial relationship, operational control, and payment of royalty or franchise fee. Most critically, the goods or services offered by the franchisee must be identified with the franchiser, such that the end consumer perceives them as originating from the franchiser itself. The distinction between a franchiser and a statutory authority granting licenses becomes even clearer when illustrated through practical examples. A franchiser operates in the commercial domain and grants to another party the right to conduct business in a manner that is identified with the franchiser itself. For instance, in the case of McDonald’s, a franchisee operates a restaurant under the name, branding, and business model of McDonald’s. The food, services, and overall customer experience are presented as those of McDonald’s, and the public perceives the outlet as part of the franchiser’s global business. The fee paid by the franchisee is thus a commercial consideration for the use of brand, goodwill, and operational system, and the franchisee effectively acts as an extension of the franchiser. In stark contrast, a statutory authority such as the

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petitioner Authority does not operate any commercial business capable of being franchised. When it issues licenses under the Act, it does not grant its own business rights, rather, it permits independent entities to operate within a regulated framework. For example, telecom operators such as Jazz or Zong provide telecommunication services to consumers under their own names, infrastructure, and commercial arrangements. A consumer subscribing to Jazz or Zong services does not perceive such services as being provided by the petitioner Authority, nor are they marketed as services of the petitioner Authority. There is, therefore, no element of identity or representation linking the services of these operators with the Authority. Thus, the analysis reinforces the conclusion that no such relationship exists in the present cases.

27.To further fortify the above analysis, it is appropriate to examine judicial precedents, where courts have consistently emphasized the essential ingredients of a franchise and the distinction between regulatory authorization and commercial franchising. In Indian jurisprudence, the distinction between statutory licensing and commercial franchise has been conclusively maintained. The Honorable Supreme Court of India, while interpreting taxing statutes relating to service tax, held that the mere grant of a license or permission by a statutory or regulatory authority does not amount to provision of taxable service or creation of a franchise relationship. Reference may be made to State of U.P. vs. Union of India, (2003) 3 SCC 239. Similarly in subsequent service tax rulings, the Supreme Court categorically held that the mere characterization of an activity as a “service” does not ipso facto render it taxable, rather, the true nature and statutory context of the activity must be examined. It was also observed that regulatory fees collected under statutory authority lack the element of quid pro quo necessary for a commercial transaction, and therefore cannot be equated with consideration for services or franchising rights. The relevant portion of the said judgment is reproduced as under:- “44. According to BPL, it did not sell cellular telephones. As far as SIM cards were concerned, it was submitted that they had no sale value. A SIM card merely represented a means of the access and identified the subscribers. This was part of the service of a telephone connection. The Court rejected this submission finding

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that the SIM card was "goods" within the definition of the word in the State Sales Tax Act. It is not possible for this Court to opine finally on the issue. What a SIM card represents is ultimately a question of fact as has been correctly submitted by the States. In determining the issue, however the Assessing Authorities will have to keep in mind the following principles: If the SIM Card is not sold by the assessee to the subscribers but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the Sales Tax Authorities to levy sales tax thereon. There is insufficient material on the basis of which we can reach a decision.”

28.Moreover, the Honorable Division Bench of this Court vide judgment dated 30.05.2024 passed in the case titled as Pakistan Telecommunication Authority vs. The Additional Collector Sales, etc, ( F.E.R.A. No. 1 of 2014) has also conclusively addressed the question, whether the grant of license for a fee by the petitioner Authority to the telecom service providers resulted in a ‘franchise’ between the PTA and its licensee. The operative part of the said judgment is reproduced as under:- “8. The services in question could either be telecommunication services listed in “Telecommunications” per serial no. 6, or “Franchise Services” per serial no. 11, of the First Schedule to the Act. The case of the department throughout has been that the services in question on which the FED was claimed by the department fell under serial no. 11 for being franchised services. However, the department remains singularly unable to demonstrate how PTA could be a franchisor, given that PTA itself could neither set up a commercial telecommunication network nor provide any commercial telecommunication services to the consumers of that service and, accordingly, no telecommunication service was named in the orders below as being provided by the PTA’s licensees which could be identified with PTA’s services.

9.Vide its judgment in Pakistan Television Corporation vs Commissioner Inland Revenue (2023 PTD 102), a Division Bench of this Court, after analyzing precedent, laid down the ingredients of a franchise, as defined in section 2(12a), as follows: “The ingredients to infer a franchise under section 2(12a) of the Act are 5 in number, namely: (i) authority by the franchisor, (ii) the resultant right acquired by the franchisee, (iii) the franchised service or product, (iv) the fee therefore, and (v) the identification of the product or service with the franchisor. All the impugned orders, however, focus only on the first 4 ingredients and leave

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out the most critical ingredient no. (v). Not keeping the “identified with the franchiser” ingredient as the overriding one leads to reduction ad absurdum, reducing the myriad business relationships in an economy, recognized as legally distinct relationships with distinctly peculiar characteristics, to one single description. For then the legal doctrines of agency, construction, charterparty, outsourcing, advertising, transportation, and well- nigh all else will be reduced to the singular description of franchise as they all contain the ingredients (i) to (iv) noted above. The conclusion that the Legislature did not intend so can safely be gleaned from the words “identified with franchiser” found in section 2(12a), and for the good reason explained above.

10.Merely being licensed to provide any services by a licensing authority does not create a franchise. If the department’s view were upheld, it would have monstrous consequences, in that even driving licenses given by the Motor Vehicle Authority, generation licenses issued by the power sector regulator to the power generation companies, licenses for import and export, and the like, where the right to engage in the licensed activity could not be undertaken without such license, would fall under the rubric franchise. A conclusion such as that would be absurd to the extreme and contrary not only to the internationally recognized concept of a franchise but would also do violence to the language of the taxing statute itself.

11.The department’s learned counsel cited M/s CM Pak Limited vs Additional Commissioner, Inland Revenue, Islamabad (2013 SCMR 749) to assert that the entries in the audited account of the operators were conclusive of a franchise relationship. This argument is misconceived. In CM Pak case, the appellant CM Pak Limited had itself in its accounts recorded the payments as technical fee to its parent company, Millicom International Cellular S.A., and it was a case where, consistent with the practice in the telecom industry, the holding company was receiving fee for technical services provided to its subsidiary, and that case is therefore clearly distinguishable from this case where the fee is not received by PTA in consideration of any technical services provided by PTA to its licensees. Further, the treatment given in their audited accounts by the operators does not in any manner dictate or determines the matter of interpretation and application of the statutory provisions of the Act in the context of the legal relationship between a statutory regulator and its regulated entities.

12.For the foregoing reasons, the question of law is answered that no franchise relationship arose between the PTA and its licensees by virtue of the grant of licenses by PTA against the license fee.”

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29.In view of the foregoing discussion, it stands conclusively established that the relationship between the petitioner Authority and its licensees does not, in law or in fact, give rise to any franchise–franchiser arrangement. The premise advanced by the respondent department is founded on a misconstruction of Section 4(a) of the Act and a misapplication of the statutory definition of “franchise” under the Federal Excise framework. The essential ingredient of a franchise, namely, the identification of the service or product with the franchiser, is wholly absent. The petitioner Authority neither renders telecommunication services nor holds itself out as the provider thereof, nor are the services of its licensees marketed, branded, or represented as attributable to it. The licensing regime under the PTRA 1996 operates purely as a mechanism of regulatory authorization, enabling independent operators to undertake telecommunication activities subject to statutory oversight, without any representational nexus with the Authority; and the issuance of licenses for a prescribed fee, being a statutory charge, does not introduce the element of commercial identity or mutuality required under the law. The Authority, being neither a provider of telecommunication services nor capable of rendering such services under its governing statute, cannot be brought within the charging provisions of the Federal Excise Act. The Impugned show cause notices therefore suffer from a patent lack of jurisdiction, having been raised without lawful authority and in disregard of the clear statutory scheme.

30.We shall now briefly address to the second question framed. It is of considerable significance that the very issue regarding the levy of Federal Excise Duty upon the Pakistan Telecommunication Authority had earlier arisen in the year 2015, whereupon the matter was referred by the concerned department to the Cabinet Division vide letter dated 03.05.2016. The Cabinet Division, in turn, sought a formal legal opinion from the Ministry of Law and Justice in terms of Rule 14 of the Rules of Business, 1973. The opinion so rendered carries persuasive value and provides important insight into the legal character of the Authority, which is reproduced as under:- “5. It seems pertinent to examine as to whether the Pakistan Telecommunication Authority (PTA) is liable to tax. The PTA has been established under section 3 of Pakistan Telecommunication Authority (Re-organization) Act, 1996 (XVII of 1996) hereinafter

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referred to as the said Act. Under section 12 of the said Act the Authority shall, in respect of each financial year, prepare its own budget and submit to the Federal Government three months before the commencement of every financial year. The budget statement shall specifically state the estimated receipts and expenditure and the sums which are likely to be required by the Authority from the Federal Government for the relevant financial year. Sub-section (3) of section 12 says that any surplus of receipts over the actual expenditure in a year shall be remitted to the Federal Consolidated Fund and any deficit from the actual expenditure shall be made up by the Federal Government. Under section 15 of the said Act the accounts of the Authority shall be audited at the close of each financial year by the Auditor-General of Pakistan. Reference may also be made to section 23A of the said Act which requires that all fines and penalties recovered by the Authority shall be credited to the Federal Consolidated Fund.

6.It would, therefore, transpire that any surplus of receipts over the actual expenditure in a year is remitted to the Federal Consolidated Fund and any deficit from the actual expenditure is required to be made up by the Federal Government. Further all fines and penalties recovered by the Authority are credited to the Federal Consolidated Fund. It would appear that the Pakistan Telecommunication Authority is a limb of the State and lifting the veil of incorporation it would transpire that ultimate destination of its receipts and expenditure is the Federal Government and, therefore, the Pakistan Telecommunication Authority is entitled to exemption from payment of duties and taxes in view of Article 165 of the Constitution of Islamic Republic of Pakistan as the Pakistan Telecommunication Authority is performing functions on behalf of the Federal Government.”

31.It is evident from a bare perusal of the opinion that the issue has also been clarified through a governmental legal opinion, which uniformly negates the existence of any franchise relationship in respect of the petitioner Authority’s licensing functions. In light of this consistent legal position, it is evident that the attempt by the department to characterize the petitioner Authority as a franchiser is wholly misconceived, legally unsustainable, and contrary to the settled interpretation of law. Consequently, after an analysis of the statutory framework, and the binding judicial precedents referred to hereinabove, we are of the considered opinion that the Impugned Show Cause Notices proceed on an incorrect appreciation of law and a mischaracterization of the legal and functional status of the petitioner Authority. The petitioner Authority neither renders telecommunication services nor holds itself out as the

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provider of such services; rather, it discharges a sovereign regulatory function by granting statutory licenses to independent operators who conduct their own commercial activities in their own names and capacities. The issuance of licenses upon payment of prescribed fee, being purely regulatory in nature, does not constitute a commercial franchise nor does it create any taxable nexus under the Federal Excise Act, 2005.

32.The objection raised by the learned counsel Mr. Osama Shahid regarding the non-maintainability of these writ petitions which arise from the Impugned Show Cause Notice is devoid of merit and does not warrant acceptance. It is a settled proposition of law that where an action is ex facie illegal, and the facts of the case substantiate such illegality, the exercise of constitutional jurisdiction is not precluded. The superior courts have consistently held that where a show cause notice is issued without lawful authority, is ultra vires, or is tainted with mala fides, such proceedings ought to be interdicted at the threshold rather than allowing them to culminate in further illegality.1

33.In view of the foregoing discussion, all these petitions are allowed. The Impugned Notices having being issued without lawful authority and jurisdiction are hereby set-aside. There shall be no order as to costs.

(MUHAMMAD AZAM KHAN) (INAAM AMEEN MINHAS)

JUDGE JUDGE

ANNOUNCED IN OPEN COURT ON__________

JUDGE JUDGE

APPROVED FOR REPORTING

1 Messrs Pakisan Oilfields Limited through General Manager vs. Federation of Pakistan through Ministry of Finance and 4 others (2020 PTD 110), PKP Exploration Limited and others vs. Federal Board of Revenue through Chairman and others (2021 PTD 1644), Mughal-E-Azam Banquet Complex (2011 PTD 2260) and Northern Power Generation Company Ltd. v. Federation of Pakistan and others (2015 PTD 2052).