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2017 P T D 636

[Lahore High Court]

Before Shahid Karim, J

PEPSI-COLA INTERNATIONAL (PVT.) LTD.

Versus

FEDERATION OF PAKISTAN and others

W.P. No.24827 of 2012, decided on 19th December, 2016.

Nasar Ahmad D.A.G. for Respondents.

Sarfraz Ahmad Cheema and Liaqat Ali Chaudhry for Respondent-department along with Dr. Ishtiaq Ahmad, CIR for Respondents.

Date of hearing: 24th November, 2016.

JUDGMENT

SHAHID KARIM, J.—This judgment shall also decide connected petitions W.Ps. Nos.10182 of 2013, 31567 of 2013 and 22891 of 2014. There are common facts which run through these petitions. The decision of these petitions is being handed down together since these petitions are inextricably linked with each other and the decision of one petition will necessarily impact the other petitions as well.

Facts about the Petitioner:

2. Pepsi Cola International (Pvt.) Limited (“Pepsi”) is a private limited company incorporated under the Companies Ordinance, 1984 (“the Ordinance, 1984”). The parent entity of Pepsi is Pepsi Co. Inc. Pepsi is engaged in the business of granting franchise rights to independent third parties (referred to herein as the “Bottlers”) to bottle, sell and distribute in designated franchise territories carbonated soft drinks known and sold under the world famous trade marks including Pepsi-Cola, Mountain Dew, Mirinda, Teem and Sting etc. (Beverages). The business comprises the sale of the key ingredient known as Concentrate to the Bottlers for producing the Beverages. The franchise rights are granted to the Bottlers through an agreement referred to as Exclusive Bottling Appointment (EBA) and is entered into between Pepsi Co. Inc. and the relevant Bottlers in Pakistan. According to the contents of the petition, there are eight separate and distinct legal entities which have been appointed as Bottlers pursuant to respective EBAs and have been assigned and designated exclusive territories within the country to bottle, sell and distribute the Beverages. It is common ground that neither Pepsi nor Pepsi Co. Inc. has any ownership or propriety interest in the franchises and the entire transaction is at arms length in connection with the relevant business transactions. It has been emphasized in the petition that Pepsi is not involved in the actual production, bottling and distribution of the finished product i.e. the Beverages in Pakistan. The primary activity is limited to sale and supply of the Concentrate. In order to produce and bottle the Beverages, a key ingredient (raw material) is the Concentrate which each bottler purchases from Pepsi, the formula for which is patented and unique to Pepsi Co. Inc. It has been a common theme in the petitions that by its very nature the Concentrate is a product which has no substitute in the market. There is thus no general and common market with the Concentrate and it can only be sold to and consumed by the Bottlers which are also required to utilize it solely and exclusively for the purpose of producing the Beverages. In the context of the present controversy, it has been stated that it was well-nigh impossible to have a similar product to the Concentrate and similarly it was impossible to assign any general market price or value based on a like or a similar product to the Concentrate.

3. In order to ensure consistency of quality, Pepsi follows an established procedure prevalent in all countries for advertising and marketing of the Beverages. It requires exclusive advertisement to maintain or increase market share for each of the Bottlers in their respective sales territories. For the purpose, the petitioner and the Bottlers entered into an agreement referred to as the Cooperative Advertising and Marketing Agreement (CAMA). This agreement is an annually executed agreement between Pepsi and each Bottler which sets out the mutually agreed marketing and advertising commitments of Pepsi and each of the Bottlers. CAMA delineates the respective commitments of Pepsi and the Bottlers to undertake advertising schemes. Pepsi commits to fund and undertake national level advertising schemes for the promotion of the brand. This is classified as “Pull” advertising and draws its name from the marketing initiatives intended to pull the customers and the consumers of the finished product towards purchasing the Beverages. Under the CAMA, mutually agreed commitment of the relevant Bottlers is to fund the local level advertising and marketing initiatives such as offering discounts to key customers entering into exclusivity arrangements with local restaurants, provision of free liquid and trade discounts etc. These local level and territory specific advertising initiatives are referred as “Push” advertising since these are undertaken with the objective of pushing the sales of the Beverages from the retail outlets to oust the competition and are not related to the promotion of the brand. In a word, according to Pepsi, these advertising and marketing activities:–

a) are separate, distinct and additional to the sale of goods transaction involving the sale and supply by the petitioner of the Concentrate to the Bottlers;

b) the Push advertising activities have no nexus whatsoever with the value or price of the Concentrate which is a totally independent and separate transaction;

c) are undertaken and paid for by the Bottlers (and not by the petitioner) essentially for the benefit of increasing sales of the Beverages solely within each franchise territory.

4. The precise submission of Pepsi is that in issuing the impugned show-cause notices arbitrarily and unreasonably, the respondent No.4 has acted beyond the jurisdiction by making the assertion that expenditure of advertisement is part of the consideration for Concentrate sold to the Bottlers by Pepsi even though the said expenditure is not incurred by Pepsi. Thus, third party cost is being included in the value on which duty and sales tax is required to be paid.

5. The respondent No.4 alleges that the advertising and marketing expenses incurred by the Bottlers should have been added to the cost of the Concentrate and thereby calculation of excise duty and consequent sales tax thereon, as according to the said respondent, the advertising and marketing expenses are part of the consideration due for the Concentrate even though the same pertains to activities not undertaken by Pepsi and are costs which should not have been incurred or paid by Pepsi. In short, it has been alleged by the respondent No.4 in the show-cause notices issued to Pepsi and under challenge herein that the franchisers had actually received cash payments as reimbursement for advertising and marketing undertaken for and on behalf of Pepsi. Pepsi denies that it has ever received any payment from the Bottlers for advertising and marketing undertaken by them.

Impugned Notices:

6. Each constitutional petition impugns a separate show-cause notice. The brief facts relating to each petition and the cause of action for the filing of that petition are brought forth herein below:–

W.P. No.24827 of 2012

“The petition challenges the validity, legality and constitutionality of two Show-Cause Notices dated 31.08.2012 issued by the Inland Revenue Department.

The first Show-Cause Notice dated 31.08.2012 (Pg.36) was issued under Section 14 of the Federal Excise Act, 2005 read with Sections 11(2) and 36(1) of the Sales Tax Act, 1990 as well as Sections 8 and 19 of the Federal Excise Act and Sections 34 and 33 of the Sales Tax Act for default surcharge and penal action.

The first Show-Cause Notice covered the period from January 2007 to June 2008. The total demand raised by the Department was Rs.340,161,292/- on account of Sales Tax and Rs.708,669,359/- on account of Excise Duty in addition to default surcharge/additional tax thereon.

The second Show-Cause Notice dated 31.08.2012 (Pg. 44) was also issued under Section 14 of the Federal Excise Act, 2005 read with Sections 11(2) and 36(1) of the Sales Tax Act, 1990 as well as Sections 8 and 19 of the Federal Excise Act and Sections 34 and 33 of the Sales Tax Act for default surcharge and penal action.

The second Show-Cause Notice covered the period from July 2008 to June 2011. The total demand raised by the Department was Rs.1,241,986,495/- on account of Sales Tax and Rs.2,587,471,865/- on account of Excise Duty in addition to default surcharge/additional tax thereon.

Both the Show-Cause Notices were issued in pursuance of contravention reports submitted by the Directorate General, Intelligence and Investigation. The allegation was that the Petitioner and its bottlers had entered into collusive agreements in order to evade excise duty. It was contended that the marketing expenses admittedly incurred by the bottlers were solely for the benefit of the Petitioner and hence the entire amount thereof had to be included to the price of concentrate sold by the Petitioners for the purposes of calculating Sales Tax and Excise Duty.

W.P No.10182 of 2013

The petition challenges the validity, legality and constitutionality of Show-Cause Notices 20.03.2013 issued by the Inland Revenue Department.

The Show-Cause Notice dated 20.03.2013 (Pg. 33) was issued by the Deputy Commissioner under section 122(5) & (9) of the Income Tax Ordinance, 2001 for the purposes of amending the petitioner’s income tax return for the tax year 2007.

The allegation in the Show-Cause Notice dated 20.03.2013 was similar to that made in the Show-Cause Notices impugned in Writ Petition No.24827/2013. It alleged that the petitioner and its bottlers had entered into collusive agreements in order to evade excise duty. It was contended that the marketing expenses admittedly incurred by the bottlers were solely for the benefit of the petitioner and hence the entire amount thereof had to be included to the price of concentrate sold by the petitioners and hence its income for the purposes of calculating Income Tax.

W.P No.31567 of 2013

The instant petition challenges the validity, legality and constitutionality of Show-Cause Notices 13.11.2013 issued by the Inland Revenue Department.

The Show-Cause Notice dated 13.11.2013 (Pg. 36) was issued by the Deputy Commissioner under section 122(5) & (9) of the Income Tax Ordinance, 2001 for the purposes of amending the petitioner’s income tax return for the tax year 2008.

The allegation in the Show-Cause Notice dated 13.11.2013 was similar to that made in the Show-Cause Notices impugned in Writ Petition No.24827/2013. It alleged that the petitioner and its bottlers had entered into collusive agreements in order to evade excise duty. It was contended that the marketing expenses admittedly incurred by the bottlers were solely for the benefit of the petitioner and hence the entire amount thereof had to be included to the price of concentrate sold by the petitioners and hence its income for the purposes of calculating Income Tax.

W.P No.22891 of 2014

The instant petition challenges the validity, legality and constitutionality of Show-Cause Notices 16.07.2014 issued by the Inland Revenue Department.

The Show-Cause Notice dated 16.07.2014 (Pg. 41) was issued by the Deputy Commissioner under section 122(5) & (9) of the Income Tax Ordinance, 2001 for the purposes of amending the petitioner’s income tax return for the tax year 2006.

The allegation in the Show-Cause Notice dated 16.07.2014 was similar to that made in the Show-Cause Notices impugned in Writ Petition No.24827/2013. It alleged that the petitioner and its bottlers had entered into collusive agreements in order to evade excise duty. It was contended that the marketing expenses admittedly incurred by the bottlers were solely for the benefit of the petitioner and hence the entire amount thereof had to be included to the price of concentrate sold by the petitioners and hence its income for the purposes of calculating Income Tax.

Submissions of the counsel:

7. As a prefatory, it may be stated that the grievance of Pepsi primarily stems from the show-cause notice dated 31.8.2012 (First Show-Cause Notice) issued by the Deputy Commissioner (Inland Revenue) Audit-03, Zone-II, LTU, Lahore, which is a show-cause notice in terms of section 14 of the Federal Excise Act, 2005 (“the Act, 2005”) and sections 11(2) and 36(1) of the Sales Tax Act, 1990 (“the Act, 1990”). This was followed by another show-cause notice on 31.8.2012 (Second Shoe Cause Notice) by the same officer yet for a different period and under the same provisions of law. Impugned show-cause notices under the Income Tax Ordinance, 2001 merely follow as a necessary corollary and in case the first two show-cause notices are dealt with and their sufficiency in law is determined, the show-cause notices under the Income Tax Ordinance, 2001 can be dealt with in the light of the findings on the first two show-cause notices impugned in these petitions and issued in terms of section 14 of the Act, 2005 and section 11 of the Act, 1990.

8. Pepsi claims to be one of the largest Beverages companies in Pakistan for the last 20 years and the Federal Board of Revenue (FBR) does not dispute this assertion. FBR says that the Concentrate sold by Pepsi for Rs.100 is to be reckoned as Rs.110 on account of the marketing expenses of Rs.10 being incurred by the Bottlers on behalf of Pepsi.

9. Pepsi challenges the show-cause notices primarily on three grounds:–

I. The show-cause notices are based on the report of the Director General (Intelligence and Investigation) Inland Revenue and since the D.G, (I & I) does not have the jurisdiction for such matters, any superstructure built on the unlawful report of the D.G will fall to the ground and is ultra vires.

II. Section 14 of the Act, 2005 deals with the recovery and not the assessment. In this case, an assessment had to precede the recovery to be set in motion under section 14 of the Act, 2005. The assessment could only have been made under section 12 of the Act, 2005 which relates to the determination of value of the supply of goods.

III. The jurisdiction in such matters lies with the Valuation Committee set up under section 2(46) of the Act, 1990 and not with the department and certainly not through a notice under section 14 of the Act, 2005.

IV. Section 11 of the Act, 1990 clearly draws a distinction between the assessment and recovery and it follows ineluctably that these provisions envisage two separate show-cause notices for the assessment of excise duty and sales tax and the other for the recovery of the excise duty and tax.

V. The impugned show-cause notices have been called in question on the grounds of mala fide on the part of FBR and its officers.

10. FBR and the department seriously take cavil to the maintainability of these petitions. It is asserted that the show-cause notices under the relevant provisions can be issued on an information laid before the relevant officers issuing the show-cause notices. It is contended that in a plethora of judgments by the superior courts it has been held that a show-cause notice cannot be called in question in collateral proceedings since an alternate and efficacious remedy is available in the statutory framework under which the show-cause notices are issued. It is only in exceptional circumstances that a direct challenge by way of constitutional petition can be made and which circumstances are conspicuously missing in the instant cases. According to the FBR and department the assessee makes the assessment under section 12 of the Act, 2005 and thereafter the Commissioner determines whether the assessment is valid or not under the provisions of section 14 of the Act, 2005.

11. The learned D.A.G drew a distinction between the first show-cause notice and the second show-cause notice with regard to the periods to which they relate. He was of the opinion that the Valuation Committee was the proper forum and the dispute regarding the valuation given in the invoice ought to have been referred to the Valuation Committee set up under section 2(46) of the Act, 1990.

Maintainability:

12. A frontal attack was made by the FBR on the maintainability of these petitions on the ground that they circumvent and divest the normal course of adjudication prescribed under the Act, 2005 and the Act, 1990 as also the Income Tax Ordinance, 2001. The precise contention was that if proceedings for adjudication of assessment and recovery of taxes and duties have been set in motion by the officer empowered to undertake such adjudication under the relevant statutes, it has been vouched by respectable authority that constitutional petition will not be entertained by this Court unless the assumption of jurisdiction by the authority or the forum is ultra vires and suffers from patent illegality. I need not advert to the entire body of case law on the subject. The proposition stands crystallized over the years and the precedents circumscribe the conditions under which a collateral challenge can be maintained to proceedings for the assessment and recovery commenced under the relevant statutes. In Murree Brewery Co. Ltd. v. Pakistan and others (PLD 1972 SC 279), it was held that “in order to maintain a challenge the order has to be wholly without authority”. Chairman, Central Board of Revenue v. Pak-Saudi Fertilizer Ltd. (2001 SCMR 777) laid down the proposition that the proceedings have to be without jurisdiction and against which no appeal lies for it to be liable to challenge in the Constitutional jurisdiction of this Court. The principles for interference in the proceedings for adjudication were also laid down in Collector of Customs, Lahore v. S.M. Ahmed and Co. (1999 SCMR 138) in which it was held that a challenge was maintainable:–

I. Where the remedy was illusory in nature and CBR had already expressed its opinion.

II. Where dispute between the parties was in respect of fiscal rights based on statutory instrument. (Reliance for this proposition was drawn from (PLD 1971 SC 205).

13. This proposition was reiterated in Pak Land Cement v. Central Board of Revenue (2007 PTD 1524). In (2011 PTD 2260) the test for interference laid down was that the proceedings ought to be without jurisdiction so as to entitle a person to maintain a constitutional challenge. In recent times in (2009 PTD 1392), the Supreme Court of Pakistan following the decision in Murree Brewery Co. Ltd. case (ibid) and reiterated that the only exception to the general rule was a case wherein an order was wholly without authority or where a statutory functionary acted mala fide or in an unjust and oppressive manner. Under these circumstances, it was held that the High Court had the power to grant relief to the aggrieved person. The rule was further elaborated in (2012 PTD 1374) where the tendency to bypass the remedy provided in the relevant statute and to press into service the Constitutional jurisdiction of the High Court was deprecated with the exception that when the impugned order/action was palpably without jurisdiction or mala fide.

14. On the touchstone of the principles laid down above, I hold that the present petitions are maintainable, in that, Pepsi alleges that the proceedings which have been initiated by the impugned show-cause notices are without jurisdiction and that the dispute between the parties is in respect of fiscal right based on a statutory instrument. The precise contours of the jurisdictional challenge have been brought forth above and this brings the case of Pepsi within the exceptions laid down by the superior courts in the precedents cited above. The challenge on this basis is that the show-cause notices dated 31.8.2012 expressly state that the D.G I&I had given some findings on the basis of which the show-cause notices are being issued. Pepsi submitted that the report of D.G I&I was illegal and without jurisdiction and that the report has no legal sanctity. Since the report is ultra vires, the show-cause notices which are based on that report are also a nullity. This has been pleaded on the adage that if the foundation of any proceedings collapses, the entire superstructure built thereon would also fall.

15. Specific powers of the D.G I&I at the time of the preparation of the contravention repot were set out in S.R.O. No.777(I)/2011 dated 19.8.2011. Those powers are listed in Column III of the table in SRO 777. The Directorate General (Intelligence and Investigation) Inland Revenue has been set up in pursuance of the powers under subsection (2) of section 29 of the Act, 2005. It has been contended that the definition clause given in section 2(12) of the Act, 2005 does not and in any case cannot confer any substantive power on the Board and the Board has simply the power to appoint an officer of Directorate General I&I to exercise the powers of the officers of Federal Excise and, in fact, the officers of the Directorate General were not appointed as officers of Federal Excise but were merely conferred some of the powers of those officers.

16. However, this objection by Pepsi should received a short shrift. Upon a holistic reading of the show-cause notices dated 31.8.2012, it becomes evident that the basis of the show-cause notices is not entirely and wholly the information given by the Directorate General, I&I (Inland Revenue) although the proceedings were triggered by the information, which was gathered by the Directorate General and which was laid before the officer who has issued the show-cause notices. Thereafter, the officer proceeded to make his own inquiries and, in fact in this regard, required Pepsi to furnish the relevant record for the period of last five years for verification. This was complied with and Pepsi did provide the record for the period from January, 2007 to December 2011. Upon a scrutiny of the record, the officer issuing the notices formed an opinion that evasion of federal excise duty and sales tax had taken place and Pepsi had fallen in default of the various provisions of the Act, 2005 and the Act, 1990. The officer who issued the show-cause notices made his own inquiries and analysed various agreements which was the foundation of the relationship between Pepsi and the Bottlers on the one hand and Pepsi and Pepsi-Co-Inc USA on the other. Nowhere in the show-cause notices does the officer rely upon the information collected by the Directorate General nor did he base the contents of the show-cause notices on the opinion formed by the Directorate General. Thus, it would a fallacy to allege that the fundamental sinew of the show-cause notices is entirely the information collected by the Directorate General I&I and the officer issuing the show-cause notices did not apply his independent mind to the facts of the case before proceeding to issue the show-cause notices. Nothing in my opinion turns on this aspect of the matter and it is otiose to assert that since some information was laid before the officer issuing show-cause notices on the part of the Directorate General, the entire superstructure was to crumble.

Valuation Committee challenge:

17. As adumbrated, this petition (W.P. No.24827 of 2012) seeks to lay a challenge to the validity and legality of two show-cause notices of 31.8.2012 issued by the Deputy Commissioner (IR) Large Taxpayer Unit, Lahore. The only difference in these two show-cause notices is the period to which they relate. The First Show-Cause Notice encompasses a period from January, 2007 to June, 2008 (First Show-Cause Notice) whereas the Second Show-Cause Notice of even date covered a period from July, 2008 to December, 2011. The other petitions impugn show-cause notices under the Income Tax Ordinance, 2001 which are merely a consequence of the First Show-Cause Notice and in case the legality of the First and Second Show-Cause Notices is determined upon, the notices under the Income Tax Ordinance, 2001 will fall to the wayside. The foundational basis for setting into motion the proceedings against Pepsi was the failure to mention the correct value of supply of the Concentrate by Pepsi to the Bottlers and which, in the estimation of the department, resulted in the evasion of federal excise duty. This alleged evasion of excise duty triggered a spiral effect and necessitated the department to allege the evasion of sales tax as well as income tax under the respective statutes. Therefore, for all intents, the controversy at the heart of these petitions relates to the issue whether the duty to be paid under section 12 of the Act, 2005 was paid on the basis of actual value of the goods or Pepsi resorted to a contraption and thus evaded the excise duty and consequently other taxes as well. It is important to bear in mind the structure of law which will exercise a gravitational pull on the determination of this controversy. Section 12 is the pivotal section and in particular subsection (1) of section 12 of the Act, 2005. Subsection (1) of section 12 of the Act, 2005 was couched in the following language till it was substituted by Finance Act, 2008. It read as under:–

“Sec. 12(1)—Substitution—Before substitution by Finance Act, 2008, subsection (1) read as follows:-

“(1) Where any goods are liable to duty under this Act at a rate dependent on their value, duty shall be assessed and paid on the basis of wholesale cash price of that goods and where such price is not available, of identical or similar goods, on which the goods are capable of being sold to a general body of retail traders and if there is no such body, to the general body of consumers on the day of its sale, without any deduction whatever except the amounts of duty and sales then payable.”

18. By Finance Act, 2008, subsection (1) was substituted and currently reads as follows:–

“12. Determination of value for the purposes of duty.- Where any goods are liable to duty under this Act at a rate dependent on their value, duty shall be assessed and paid on the basis of value as determined in accordance with subsection (46) of section 2 of the Sales Tax Act, 1990, excluding the amount of duty payable thereon.”

19. The First Show-Cause Notice relates to the period prior to the amendment brought about by Finance Act, 2008. I shall revert to it later but firstly I shall deal with the Second Show-Cause Notice which relates to the period after subsection (1) of section 12 of the Act, 2005 was substituted by Finance Act, 2008.

20. The other provisions which will be considered during the course of this judgment are section 14 of the Act, 2005 and section 2(46) of the Act, 1990. For facility, they are reproduced as under:–

14. Recovery of unpaid duty or of erroneously refunded duty or arrears of duty, etc.—-(1) Where any person has not levied or paid any duty or has short levied or short paid such duty or where any amount of duty has been refunded erroneously, such person shall be served with notice requiring him to show-cause for payment of such duty provided that such notice shall be issued within five years from the relevant date.

(2) The officer of Inland Revenue, empowered in this behalf, shall after considering the objections of the person served with a notice to show-cause under subsection (1), determine the amount of duty payable by him and such person shall pay the amount so determined along with default surcharge and penalty as specified by such officer under the provisions of this Act:

Provided that an order under this section shall be made within one hundred and twenty days of issuance of show-cause notice or within such extended period as the Commissioner may, for reasons to be recorded in writing, fix, provided that such extended period shall in no case exceed sixty days:

Provided further that any period during which the proceedings are adjourned on account of a stay order or Alternative Dispute Resolution proceedings or the time taken through adjournment by the petitioner not exceeding thirty days shall be excluded from the computation of the periods specified in the first proviso.

(3) Where any amount of duty levied and penalty imposed or any other amount payable under this Act is due from any person, such amount or sum shall be recovered in such manner as is prescribed under this Act or rules made there under.

(4) Notwithstanding anything contained under any other law for the time being in force, where any businesses or activity involving liability to charge, levy and pay duty under this Act is sold, discontinued or liquidated, the amount of unpaid or recoverable duty shall be the first charge on the assets of the business.

Explanation.—For the purpose of this section, refund includes drawback of duty and the expression “relevant date” means the date on which the payment of duty was due under subsection (3) and in case where any amount of duty has been erroneously refunded, the date of its refund.

S.2(46) of the Act, 1990:

“2(46) ‘value of supply’ means:–

(a) in respect of a taxable supply, the consideration in money including all Federal and Provincial duties and taxes, if any, which the supplier receives from the recipient for that supply but excluding the amount of tax:

Provided that.

(i) in case the consideration for a supply is in kind or is partly in kind and partly in money, the value of the supply shall mean the open market price of the supply excluding the amount of tax;

(ii) in case the supplier and recipient are associated persons and the supply is made for no consideration or for a consideration which is lower than the open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax; and

(iii) in case a taxable supply is made to a consumer from general public on installment basis on a price inclusive of mark up or surcharge rendering it higher than open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax.

(b) in case of trade discounts, the discounted price excluding the amount of tax; provided the tax invoice shows the discounted price and the related tax and the discount allowed is in conformity with the normal business practices;

(c) in case where for any special nature of transaction it is difficult to ascertain the value of a supply, the open market price;

(d) in case of imported goods, the value determined under section 25 of the Customs Act, including the amount of customs-duties and central excise duty levied hereon;

(e) in case where there is sufficient reason to believe that the value of a supply has not been correctly declared in the invoice, the value determined by the Valuation Committee comprising representatives of trade and the Inland Revenue constituted by the Commissioner; and

(f) in case the goods other than taxable goods are supplied to a registered person for processing, the value of supply of such processed goods shall mean the price excluding the amount of sales tax which such goods will fetch on sale in the market:

(g) in case of a taxable supply, with reference to retail tax, the price of taxable goods excluding the amount of retail tax, which a supplier will charge at the time of making taxable supply by him, or such other price as the Board may, by a notification in the official Gazette, specify.

Provided that, where the Board deems it necessary it may, by notification in the official Gazette, fix the value of any imported goods or taxable supplies or class of supplies and for that purpose fix different values for different classes or description of same type of imported goods or supplies:

Provided further that where the value at which import or supply is made is higher than the value fixed by the Board, the value of goods shall, unless otherwise directed by the Board, be the value at which the import or supply is made;”

21. Another provision on which reliance was placed by Pepsi is section 11 of the Act, 1990, which too is reproduced as follows:–

“11. Assessment of Tax and recovery of tax not levied or short-levied or erroneously refunded.—(1) Where a person who is required to file a tax return fails to file the return for a tax period by the due date or pays an amount which, for some miscalculation is less than the amount of tax actually payable, an officer of Inland Revenue shall, after a notice to show-cause to such person, make an order for assessment of tax, including imposition of penalty and default surcharge in accordance with sections 33 and 34:

Provided that where a person required to file a tax return files the return after the due date and pays the amount of tax payable in accordance with the tax return along with default surcharge and penalty, the notice to show cause and the order of assessment shall abate.

(2) Where a person has not paid the tax due on supplies made by him or has made short payment or has claimed input tax credit or refund which is not admissible under this Act for reasons other than those specified in subsection (1), an officer of Inland Revenue shall, after a notice to show cause to such person, make an order for assessment of tax actually payable by that person or determine the amount of tax credit or tax refund which he has unlawfully claimed and shall impose a penalty and charge default surcharge in accordance with sections 33 and 34.

(3) Where by reason of some collusion or deliberate act any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay any amount of tax or charge or the amount of fund erroneously made shall be served with a notice requiring him to show cause for payment of the amount specified in the notice.

(4) Where, by reason of any inadvertence, error or misconstruction, any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay the amount of tax or charge or the amount of refund erroneously made shall be served with a notice requiring him to show cause for payment of the amount specified in the notice:

Provided that, where a tax or charge has not been levied under this subsection, the amount of tax shall be recovered as tax fraction of the value of supply.

(4A) Where any person, required to withhold sales tax under the provisions of this Act or the rules made thereunder, fails to withhold the tax or withholds the same but fails to deposit the same in the prescribed manner, an officer of Inland Revenue shall, after a notice to such person to show cause, determine the amount in default.

(5) No order under this section shall be made by an officer of Inland Revenue unless a notice to show cause is given within five years, of the relevant date, to the person in default specifying the grounds on which it is intended to proceed against him and the officer of Sales Tax shall take into consideration the representation made by such person and provide him with an opportunity of being heard:

Provided that order under this section shall be made within one hundred and twenty days of issuance of show-cause notice or within such extended period as the Commissioner may, for reasons to be recorded in writing, fix provided that such extended period shall in no case exceed ninety days:

Provided further that any period during which the proceedings are adjourned on account of a stay order or Alternative Dispute Resolution proceedings or the time taken through adjournment by the petitioner not exceeding sixty days shall be excluded from the computation of the period specified in the first proviso.

(6) Notwithstanding anything in subsection (1), where a registered person fails to file a return, an officer of Inland Revenue, not below the rank of Assistant Commissioner shall subject to such conditions as specified by the Federal Board of Revenue, determine the minimum tax liability of the registered person.

(7) For the purpose of this section, the expression “relevant date” means.

(a) the time of payment of tax or charge as provided under section 6; and

(b) in a case where tax or charge has been erroneously refunded, the date of its refund.”

22. For the purposes of determination of the challenge to Second Show-Cause Notice, the amended subsection (1) of section 12 will be relevant. It simply says that where any goods are liable to duty under this Act at a rate dependent on their value, the duty shall be assessed and paid on the basis of value as determined in accordance with subsection (46) of section 2 of the Act, 1990. Therefore, this is a species of legislation by reference. It is common ground between the parties that Pepsi is liable to pay duty on the Concentrate which is supplied by it to the Bottlers and the rate depends on the value of the Concentrate. It follows ineluctably, as per mandate of subsection (1) that the duty will have to be assessed and paid on the basis of the value as determined in accordance with subsection (46) of section 2 of the Act, 1990. There is an elaborate procedure mentioned in subsection (46) of section 2 which envisages different situations in which the duty will fall to be assessed. The duty to be assessed is relatable to the value of supply which is to be determined in accordance with the procedure delineated in subsection (46) of section 2 of the Act, 1990. Thus the value of supply for the purposes of excise duty and its assessment on a certain good shall be the consideration in money including all Federal and Provincial duties and taxes which the supplier received from the recipient for that supply but excluding the amount of tax. Subsection (46) of section 2 thereafter goes on to refer to different situations in which the value of taxable supply will have to be calculated and in which situations the yardstick of consideration in money may not apply. Clause (e) of subsection (46) is relevant for our purposes and is the fulcrum of the arguments of Pepsi. It says that:–

(e) in case where there is sufficient reason to believe that the value of a supply has not been correctly declared in the invoice, the value determined by the Valuation Committee comprising representatives of trade and the Inland Revenue constituted by the Commissioner.

23. Pepsi contends that the issuance of the show-cause notices was mala fide and oppressive as well as irrational as the fiscal rights of Pepsi were based on a statutory provision and which had been enacted specifically for dealing with the situation like the one in hand and where the department has sufficient reason to believe that value of supply has not been correctly declared in the invoice. On this basis, Pepsi invites this Court to hold that the issuance of show-cause notices for recovery under section 14 is incompetent and ultra vires and if this were to be held, the entire edifice will fall. In short, Pepsi invites this Court to hold that a resort to the provisions of clause (e) of subsection (46) of section 2 of the Act, 1990 ought to have been made before issuance of a notice under section 14 of the Act, 2005.

24. Before adverting to the legality of the First and Second Show-Cause Notices and the determination of the question regarding applicability of the provisions of subsection (1) of section 12 of the Act, 2005, I shall refer to the contents of the First and Second Show-Cause Notices (which are in pari materia and almost similar in terms) in order to lay bare the case set up against Pepsi. The extracts of the contents from the Second Show-Cause Notice which bring forth the precise charge against Pepsi are reproduced hereunder:–

“By understanding value of the beverage concentrate under the garb of advertisement/marketing charges/expenditure incurred/ paid by the Bottlers under the above mentioned agreement. In the light of Section 12(1) of the Federal Excise Act, 2005 the above business is liable to Federal Excise Duty on value of supply of the Beverage Concentrate.”

“The bottlers are under obligation to abide by terms and conditions dictated/imposed by the Pepsi Cola International (Pvt.) Limited though in reciprocity no such conditions are to be fulfilled by the concentrate manufacturer. These terms and conditions in itself depict that advertising/marketing expenses borne by the bottlers are in fact incurred on the instructions of the Concentrate manufacturer. Therefore said amount is required to be considered as incurred on behalf of the concentrate manufacturer which should then be the part of price of concentrate and not the cost of products of the bottlers.”

“Since, Messrs Pepsi Cola International (Pvt.) Ltd. is seller of the concentrates, the said amount is to be included in the price of the concentrates sold to the bottlers.”

“The said company has thus bifurcated the price of its product in two parts namely (i) amount to be received in money, and (ii) amount of advertisement/marketing charges to be incurred by the bottlers on publicity/sale promotion of Pepsi Cola brands. Thus a sum total of both parts of price as mentioned above constitute the market price of the Pepsi Concentrate, whereas duty/tax has not been paid on amount of advertisement/marketing charges got incurred by the bottlers.”

“The registered person has therefore understated the value of supply for the purposes of Federal Excise Duty and Sales Tax through an arrangement with the bottlers mentioned above.”

“Had these been not a collusive arrangement as discussed earlier, the advertisement charges would have resulted into inclusion of advertisement charges into the declared sales price of concentrates i.e. open market price.”

“The amount on account of advertisement/ marketing/sales promotion etc borne by the bottlers was therefore required to be make part of value of concentrate for payment of due duty/tax whereas the same has been managed under the garb of advertisement/marketing etc to evade the government taxes through a collusive arrangement (in which the seller is dominant party) wherein both the parties are beneficiaries i.e the Concentrate manufacturer/seller succeeds in managing excessive profits/financial gain and the bottlers obtain exclusive bottling rights.”

“In accordance with section 12(1) of the Federal Excise Act, 2005 and section 2(46) of the Sales Tax Act, 1990, amount of Rs.5,174,943,730/- which was incurred on account of advertisement/marketing of Pepsi Cola, Mirinda, 7-Up etc brands beverages by the bottlers under the “Cooperative Advertising and Marketing Agreements. during the period July, 2008 to December, 2011.”

25. So the case set up against Pepsi is that it had understated the value of the Concentrate by splitting the cost of advertising / marketing incurred by the Bottlers on its behalf from the actual cost of the Concentrate. The nub of the department’s case is that the Bottlers were under an obligation by the terms and conditions imposed by Pepsi to make expenditure on the advertising and marketing of Pepsi brand and the expenses were borne by the Bottlers and incurred on the insistence of Pepsi. Therefore, the amount so incurred by the Bottlers has to be considered as having been incurred on behalf of Pepsi and, therefore, be part of the Concentrate and not the cost of the product of the Bottlers. For doing so, the show-cause notice relied upon the EBA agreement as well as the CAMA between Pepsi and the Bottlers. It is thus alleged that Pepsi has bifurcated the price of its product in two parts:–

I. The amount to be received in money; and

II. Amount of advertising/ marketing purchase to be incurred by the Bottlers on Pepsi and sale promotion of Pepsi brand.”

26. In fact, according to the department, the sum total of both the prices is the price constituting the market price of the Concentrate and duty ought to be paid on the combined effect of the said price. Pepsi has not paid the duty on the amount of advertising and marketing charges incurred by the Bottlers on its behalf.

27. From the resume brought forth above, it is clear that the department took a different view of the value of supply which in its opinion had not been correctly declared in the invoice. If this was the case set up against Pepsi and the dispute merely relates to the value of supply, will it not be legitimate to say that it is precisely these circumstances which give rise to the applicability of clause (e) of subsection (46) of section 2 of the Act, 1990. Is this not a situation which is fit for engaging the provisions of section 2(46) of the Act, 1990.

28. The officer issuing the First Show-Cause Notice has premised his case on the basis of section 12(1) of the Act, 2005 read with section 2(46) of the Act, 1990. This is evident from a reading of paragraph 12 of Second Show-Cause Notice. By relying on these provisions, the Second Sow Cause Notice alleges that a certain amount was incurred on account of advertising and marketing expenses on behalf of Pepsi by the Bottlers under CAMA during the period between July, 2008 to December, 2011. Thus, what comes out starkly from a holistic reading of the Second Show-Cause Notice is the entire reliance of the department on the provisions of section 12(1) of the Act, 2005 and section 2(46) of the Act, 1990. If these were the two provisions which formed the foundation of the case set up by the department, it is incredulous and irrational that the department leapfrogged to the issuance of a notice under section 14 of the Act, 2005 read with section 11 of the Act, 1990.

29. The title of section 12 of the Act, 2005 is “Determination of value for the purposes of duty”. Thus, the value is to be determined in accordance with subsection (46) of section 2 of the Act, 1990. Further, the determination has to be construed in the context and setting of section 2(46) wherein different tests have been given for determining the value of supply. These tests have to be applied by the supplier and the value of supply determined thereby. Subsection (46) of section 2 of the Act, 1990 is in the nature of guidelines issued to the suppliers for determining and assessing the value of supply and contemplates different scenarios. Although, clause (e) of subsection (46) of section 2 has been included in the definition clause, in my opinion, it constitutes a substantive provision and the intention of the legislature is clearly to make an effort to ascertain the correct value through a body set up in terms of clause (e) of subsection (46) by the name of Valuation Committee. This comprises representatives of the Trade and the Inland Revenue and is constituted by the Commissioner, Inland Revenue. I have no doubt in my mind as to the purpose of the setting up of the Valuation Committee. The legislative intent is also not in doubt and is clearly culled out upon a holistic reading of the provisions of the Act, 2005 and the Act, 1990. The primary purpose of setting up a Valuation Committee seems to be to spare the registered person, as also all other persons liable to the payment of duties of excise, the rigors of section 14 of the Act, 2005 which deal with the recovery of unpaid duty or of erroneously refunded duty or arrears of duty etc. Sections 12 and 14 of the Act, 2005 have different connotations and deal with separate situations. The tenor of section 12 is with regard to the assessment of duty of excise. The learned counsel for the department contended that section 12 related to the self-assessment by the person liable to duty and does not concern itself with the assessment to be made by the department. This contention is nuanced and has no legal legs to stand up. By mere fact that section 12 makes a reference to section 2(46) of the Act, 1990 is sufficient to nullify the contention raised by the learned counsel for the department. Clause (e) of subsection (46) of section 2 of the Act, 1990 is all about assessment to be done by the department independent of the assessment done by the person liable to duty. To reiterate, the Commissioner will set up a Valuation Committee if there is sufficient reason to believe that the value of supply has not been correctly declared in the invoice.

30. Section 14 of the Act, 2005, on the other hand, clearly concerns with the recovery of unpaid duty and this is a stage which comes after the assessment has been made. Section 14 applies where any person has not levied or paid any duty or has short levied or short paid such duty or where any amount of duty has not been refunded. It is only then that such person shall be served with a notice requiring him to show cause for payment of such duty. By subsection (2), the officer of Inland Revenue, empowered in this behalf, shall consider the objections of the person served with a notice to show cause and proceed to determine the amount of duty payable by him. Therefore, section 14 relates to the service of notice of show cause and the determination of the amount of duty payable by that person. However, recovery can only be effected once the assessment has been made in terms of section 12. Section 12 will come into play in the factors circumscribed by the provisions of section 12 and are merely confined to the assessment of duty which a person is liable to pay. If this were not the case, the provisions of subsection (1) of section 12 of the Act, 2005 will be rendered redundant and inoperative. The Court will not put a construction of a nature which will render a provision of law as redundant and superfluous. Therefore, the choice is between rendering a provision as redundant and thereby stultifying the legislative intent and following the procedure in all cases where the value of supply has not been correctly declared in the invoice. I have no doubt in my mind that the case set up against Pepsi relates to the assessment of the goods which are liable to duty under the Act, 2005 and the rate of the duty is dependant on the value of the goods. Assessment of duty, therefore, has to precede the recovery of the unpaid duty under section 14 of the Act, 2005. The department is not satisfied with the assessment of duty made by Pepsi and in this situation it ought to have invoked the provisions of clause (e) of subsection (46) of section 2 of the Act, 1990 and resort should have been made to that provision which is a sine qua non and is the true intent and purpose of that provision.

31. The above conclusion comports with the purposive construction readily employed by the courts as a tool of arriving at the true intent underlying a provision of law. According to Aharon Barak, Justices of the United States Supreme Court are divided on the task of constitutional interpretation, and it is his view “that purposive interpretation provides a proper solution to this interpretative dilemma”. (See his Foreword to Harvard Law Review, 2002). He goes on to say that: “one should not give the constitution a meaning that its express or implied language cannot sustain .A constitution is a unique legal document. It enshrines a special kind of norm and stands at the top of the normative pyramid ..The key question is what is the proper system of interpretation in the context of a particular system of government, in the context of a particular society”? In his view, “purposive interpretation is that proper system. Purposive interpretation is based, of course, on the concept of purpose. Purpose is a normative concept that the law constructs”.

32. As was said by Lord Griffith in the famous case of Pepper v. Hart, (1993) 1 AII ER 42, 50, (quoted in Gadoon Textile Mills v. WAPDA 1997 SCMR 641, 829):–

“The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach to give effect to the true purpose of legislation.”

33. Statutes should, said Lord Roskill in Anderson v. Ryan, (1985) 2 AII ER 355, 359,

“be given what has become known as a purposive construction, that is to say, the courts should when possible identify the mischief which existed before the passing of the statute and then if more than one construction is possible favour that which will eliminate the mischief so identified”.

34. In short, purposive interpretation rests on the straightforward premise that law is enacted to fulfill a purpose.

35. It is, therefore, held that the issuance of the notice under section 14 of the Act, 2005 is incompetent and ultra vires. The principle regarding the assessment and the recovery being two distinct and separate incidents applies equally to the duty levied under the Act, 2005 as also the sales tax in terms of the Act, 1990. Both involve the liability of the duty and the tax as the case may be to be paid at the rate which is dependent on the value of the goods and, therefore, a reference to the Valuation Committee set up under section 2(46)(e) of the Act, 1990 was a prerequisite ahead of any recovery proceedings which were to be set in motion by the department. Quite clearly, if there was no assessment, there could not be any recovery.

First Show-Cause Notice:

36. There is a slight distinction in the First Show-Cause Notice which requires a part of that notice to be dealt with separately and distinctly. As explicated, the First Show-Cause Notice pertains to the period from January, 2007 to June, 2008. Prior to the amendment by the Finance Act, 2008, section 12(1) of the Act, 2005 had a different tenor which has been reproduced hereinabove. Accordingly, the duty was to be assessed on the basis of whole sale cash price of the goods on which the goods were capable of being sold. Therefore, the best indicator for the price on which the goods were capable of being sold was the actual price at which they were sold. The only exception was that where a wholesale cash price of the goods was not available, duty was payable on the wholesale cash price of identical and similar goods on which the goods were capable of being sold. Pepsi contends that the import of the provisions of section 12(1) is that duty can only be assessed on the basis of ‘wholesale cash price of the goods .. on which the goods are capable of being sold.’ The best indicator for the price, in its opinion, on which goods are capable of being sold is the ‘actual price’ at which they are sold. This is precisely where the divergence of view takes place between Pepsi and the department. The advertisement expenses, according to the department, ought to be part of the wholesale cash price and this aspect requires an enquiry beyond the scope of the present proceedings. Pepsi has raised a number of objections to this part of the show-cause notice but I do not find any of those objections to be within the realm of jurisdictional defect so as to entitle Pepsi to maintain this petition. These objections can very well be raised before the officer who has issued the show-cause notice and there is no reasonable cause for laying a challenge to that part of the show-cause notice in collateral proceedings. Pepsi states that the First Show-Cause Notice is statute-barred and is beyond the period of limitation prescribed for its issuance. This objection too can be raised before the officer who is seized of the adjudication proceedings. To the extent of the challenge to the First Show-Cause Notice with regard to the non-payment of excise duty, the challenge must fail and Pepsi must raise all these objections before the officer who has issued the show-cause notice for determination of the matter.

W.Ps. Nos.24827 of 2012, 10182 of 2013, 31567 of 2013 and 22891 of 2014 and Income Tax Notices for the years 2007, 2008 and 2009.

37. The challenge in these petitions is to the show-cause notices issued by the Inland Revenue Department under section 122(5)(5A) and (9) of the Income Tax Ordinance, 2001 (The Income Tax Notices). The show-cause notices have arisen out of the same set of allegations as in the First Show-Cause Notice and Second Show-Cause Notice which are impugned in this petition (W.P. 24827 of 2012). By the show-cause notices in these petitions, the assessing officer is seeking to reopen Pepsi’s assessment and compute income tax after adding the value of the Bottlers marketing expenses to Pepsi’s income.

38. Pepsi contends that it is a necessary precondition under section 122(5A) of the Income Tax Ordinance, 2001 for amendment of the income tax assessments that the previous assessment should be “prejudicial to the interests of the revenue”. Thus, if no prejudice to the interest of the revenue is done, income tax assessment cannot be amended. However, in my opinion, these notices are inextricably linked to the First and Second Show-Cause Notices and, in fact, follow on the heels of the First and Show-Cause Notices. The amendment was, therefore, sought to be made on the basis of the First and Second Show-Cause Notices and encapsulating the same allegations for the years 2007, 2008 and 2009. It follows that had the First and Second Show-Cause Notices not been issued, the impugned notices by the Income Tax Department will also not have been issued as the provenance of the show-cause notices under the Income Tax Ordinance, 2001 is in actual fact the First and Second Show-Cause Notices. Therefore, in case the assessment of the value of the goods is determined by the Valuation Committee by accepting the valuation put by Pepsi, the basis will be knocked out and there will be no justification for proceeding with the show-cause notices under the Income Tax Ordinance, 2001.

39. In view of the above, these petitions are allowed and it is directed that:–

a. The Commissioner shall, by proceeding under section 2(46)(e) of the Act, 1990, set up a Valuation Committee within a period of two months from the receipt of the order of this Court. The Valuation Committee shall make a determination of the value of the Concentrate on which the duty under the Act, 2005 and the tax under the Act, 1990 is to be assessed.

b. Upon the assessment of the duty and taxes, as aforesaid, the respondent-department shall proceed on the show-cause notices accordingly. It is made clear that the First and Second Show-Cause Notices shall be held in abeyance till the time the Valuation Committee returns its findings and thereafter the proceedings shall be dependent on the valuation so made by the Committee.

c. Notwithstanding the above, the First Show-Cause Notice with regard to the allegation of evasion of excise duty only may be proceeded with by the officer concerned and Pepsi may take all objections available to it in reply to the show-cause notice which will be considered on its own merits by the concerned officer.

d. The Income Tax Notices shall also be held in abeyance till the determination by the Valuation Committee and thereafter shall take their own course in terms of the conclusion drawn by the Valuation Committee, or the officer adjudicating the First Show-Cause Notice, as the case may be.

MWA/P-1/L Petition allowed.

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