2014 P T D (Trib.) 347

[Inland Revenue Appellate Tribunal]

Before Faheemul Haq Khan, Accountant Member and Shahid Masood Manzar, Judicial Member




F.E. Nos.2/KB and 3/KB of 2010, decided on 29th November, 2013.

Naseer Ahmed Malik, C.A. for Appellant.

Aijaz Hussian, D.R./DCIR for Respondent.

Date of hearing: 24th September, 2013.


FAHEEMUL HAQ KHAN, ACCOUNTANT MEMBER.—Above captioned Federal Excise Appeals have been filed by the taxpayer against the Order-in-Appeals Nos. 19 and 20 of 2010 dated 5-11-2010 passed by the learned Commissioner Inland Revenue (Appeals-III) on grounds set forth with the memo. of appeal.

2. Briefly stated the facts of the case are that the appellant/taxpayer is engaged in manufacture and supply of beverages under the brand names of Pepsi, 7Up, Mountain Dew and Mirinda. The department discovered, that the taxpayer/company had not paid Federal Excise Duty amounting to Rs. 8,238,297 for the period 1st July, 2007 to 30th June, 2009 leviable on franchise fee or royalty under the provisions of the Federal Excise Act, 2005 read with Rule 43A of the Federal Excise Rules remitted by them to their principals for using the foreign brand name “PEPSI. A letter dated 2-10-2009 was issued to the taxpayer for providing information/data regarding payment of Federal Excise Duty on franchise services. In response to the said letter the taxpayer submitted his reply and stated that under new arrangement, it is not required to pay franchise/royalty etc. After hearing the taxpayer/appellant and perusing the submissions of the taxpayer, the DCIR passed the impugned Order-in-Original and directed the taxpayer to pay an amount Rs.8,238,297 and Rs.1,359,397 as unpaid duty along with default surcharge (to be calculated at the time of actual payment) under sections 14 and 8 and imposed penalty of 5 % of the duty involved in terms of section 19(1) of Federal Excise Duty Act, 2005.

3. Being aggrieved, the taxpayer/appellant preferred appeal before the Commissioner Inland Revenue, Appeals-III, Karachi. The CIR(A) after hearing both the rival sides, disposed off the same vide appellate order Nos. 19 and 20 dated 5-11-2010, wherein the Order-in-Appeal for recovery of amounting to Rs. 8,238,297 along with default surcharge (to be calculated at the time of payment) and 5% penalty under section 19(1) of the Federal Excise Act, 2005, were upheld pertaining to the tax period July, 2007 to June, 2009 in the following words:–

“10. Similarly, owing to the above facts and circumstance of the instant case, the contention of the learned AR of the appellant that the word franchise as defined in section 2(12a) of the Federal Excise Act, 2005 do not reflect the relationship between a parent company and a subsidiary company but it caters the needs to independent separate companies is unfounded being devoid of merits. In this context the appellant company has admitted that the appellant company is paying management fees to a parent company. Thus, if the relationship as franchiser and franchisee, if presumed, is not available, even then in terms of Federal Excise Rules, 43(A) of Federal Excise Act, 2005 read with General Order No. 5 of 2006 dated 5-8-2006, the management fee/technical fee paid/remitted to any person irrespective of the fact that the recipient is parent company or subsidiary company, Federal Excise Duty shall be charged on such management/technical fee. Thus it is established that the appellant was liable to pay Federal Excise Duty in view of the Rule and General Order quoted above.

11. Be that it may, I hold that the action of Officer Inland Revenue in treating the amount of Federal Excise Duty on franchise for the tax period from 1-7-2007 to 30-6-2009 have been found in accordance with law and is maintainable which is confirmed and appeal beings devoid of merits is dismissed.

12. Since facts and law points are identical this order shall mutus mutandis shall be applicable in appeal case No. 20/2010 filed against order No. 2(13) ST&FE/LTU/Evasion of Excise Duty/08 dated 31-5-2010 of Messrs Pakistan Beverage Limited, Hyderabad.”

4. The Taxpayer being aggrieved with the order of learned CIR(A) has now come in appeal before this forum.

5. Mr. Naseer Ahmed Malik, FCA, attended on behalf of the appellant/taxpayer and Mr. Ijaz Hussain, the learned D.R. attended on behalf of the respondent/department.

6. During proceedings before this Court, learned counsel for the Taxpayer contended that order of the learned Commissioner Inland Revenue (Appeals-III) is bad in law and on facts and the learned CIR(A) was not justified in deciding the appeal as the charges are baseless and are against the spirit of the special procedures as laid down under Rule 43A of the Federal Excise Rules, 2005. AR further submitted that the amendment made in the Federal Excise Act through Finance Act, 2008 on services rendered including franchise services which are originated outside but rendered in Pakistan shall be chargeable to Federal Excise Duty and the recipient of such services in Pakistan shall be liable to pay duty with effect from 1-7-2008. He further stated that it is established/fact that FED on services originated outside but rendered in Pakistan shall be liable from 1-7-2008 and not before July, 2008. Therefore, the action of DCIR charging FED for the period mentioned above is unjustified, uncalled for and unwarranted.

7. AR further submitted that the term “franchise” clearly stipulates that an agreement could only be identified as a franchise agreement in case the franchise is granted the representational rights to sell or manufacture goods or to provide service or to undertake any process identified with franchiser against an agreed fee or consideration including royalty. In the instant case no such agreement exists between the appellant and Messrs Pepsi-Cola International (Pvt.) Ltd., Lahore, therefore, the question of payment of any kind of franchise fee or royalty does not arise. He, therefore, prayed that the order passed by the officers below may be set aside.

8. On the other hand, Mr. Ijaz Hussain, learned D.R appeared on behalf of the Department vehemently opposed the contention submitted by the learned counsel for the Taxpayer and supported the Order-in-Original as well as Order-in-Appeal. According to him the violation of Federal Excise Act, 2005 as mentioned in the show-cause notice stand established along with default surcharge under section 8 and penalty of 5% under section 19(1) of the Federal Excise Duty Act, 2005 was correctly levied in the case of the appellant. He has pleaded that the order of the CIR please be maintained.

9. We have heard both the parties and perused the available case record. The Taxpayer entered into a tripartite agreement with the principal in USA and Pepsi-Cola, Hattar, wherein the principal directed the taxpayer (and all other Pepsi cola manufacturers) to purchase concentrate from one entity i.e. Pepsi-Cola Hattar established under the direct supervision of principal. These directions were passed to all the manufacturers of identical beverages/brand. The taxpayer did not file copy of tripartite agreement before the Assessing Officer, CIR(A) or before this forum, despite called for questioned specifically. The learned AR termed this agreement as highly classified and confidential and its exposure detrimental to the interest of business or to bring advantages to its competitors in the market. Before this agreement, the /taxpayer company was importing concentrate from the principal in USA besides the payment of franchise fee/royalty. However, after the tripartite agreement, the principal discontinued charge of royalty/franchise fee, whereas the taxpayer company continued to use the brand name and goodwill associated with the product. However, Pepsi-Cola International (Pvt.) Ltd., Lahore operating in the tax free area in Hattar now become the supplier of raw material of the Pepsi-Cola to all manufacturers working in Pakistan. In other words if the agreement, which has not been produced even before us is relied then the taxpayer is using brand name without any encumbrance or reciprocal consideration but bound to purchase concentrate from the local manufacturer who operates directly under the strategic, functional and operation supervision of Principal stationed at USA. The only specialty of Pepsi Cola Hattar is to import raw material (concentrate) from Principal at a price fixed by the Principal and sale to designated entities. We think no other entity can make purchases and manufacture either under the brand name of Pepsi Cola or any other Cola. Now from another angle, the customers of taxpayer is public at large, the customer of Pepsi-Cola International, Hattar are 15 companies working in Pakistan using the brand name of manufacturer/bottling/marketing and using the brand name of Pepsi-Cola, whereas principal i.e. Pepsi-Cola, New York, USA has only one customer i.e. Pepsi-Cola International Lahore importing semi finished product from it.

10. Another materially important area worth consideration is the test of reciprocal benefit. The seller of products i.e. the instant taxpayer is using the brand name, making purchases of raw material from only one designated seller and manufacturing as per standards set by the principal. So in these circumstances, compulsory purchase from only designated seller carries the reciprocal considerations in lieu of sale of products under a renowned brand name. On the contrary, why would foreign principal would deprive himself of two sources of earnings i.e. sale of concentrate and franchise/fee or royalty. This obvious means that earnings have not only been re-routed but re-classified as well.

11. We agree to the findings of assessing officer that this arrangement absorbed in itself the payment of royalty/franchise fee in the price of concentrate, because the importer of concentrate and the user of concentrate (or related raw material) are different entities. So the goodwill of principal stands divided which we discuss separately in the following paragraph (No.12). The relevant Federal Excise General Order No. 5 of 2006 dated 5-8-2006 clause (ii) fully envisages the above arrangement in the following words:

“(ii) In case where franchisers are foreign or local beverage companies, if there is no formal agreement between the franchiser or franchisee, the assessable value for the purpose of levy of excise duty shall be 5% of the value of concentrate supplied by the franchiser to the franchisee. However, in such cases where proper remittance/payment of fee or royalty is being made by the franchisee beverage company to the local or foreign franchiser under a proper agreement, the assessable value shall be the gross amount of fee or royalty remitted/ paid to the franchiser or the amount laid down in the agreement.”

The taxpayer never agitated upon the contents and legality of above Federal Excise General Order.

12. The principal possesses not only a brand name but also a monopolized skill in the manufacturing process of these distinct products (beverages). Besides retaining some skills with it, two entities have been created to work independently but under direct control i.e. Pepsi Cola Hattar to the extent of preparation of concentrate as per standard specification and with the help of raw material provided by him. Similarly, the instant taxpayer designated to prepare the beverage, bottle them/can them and sell in the market using brand name, thus instead of previously available one source, the principal has not two source to monitor and earn.

13. For the instant taxpayer, local purchase of concentrate also carries the element of taxability as provided in the Federal Excise General Order No. 5 of 2006.

14. Hence we are of the view that action taken by the two officers below is justified in the light of stated facts. Therefore, the appeals of the taxpayer in respect of principal levy and additional levies fail.

15. Ordered accordingly.

CMA/202/Tax(Trib.) Order accordingly.

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