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Petitioner: M/s. Squibb Pakistan Pvt. Ltd. VS Respondent: Commissioner of Income Tax.
Court Name: Supreme Court of Pakistan Judge(s): Mian Saqib Nisar, Umar Ata Bandial, Faisal Arab Title: M/s. Squibb Pakistan Pvt. Ltd. vs Commissioner of Income Tax. Case No.: Civil Appeals No, 622 & 623/2008 and 1403 & 1404/2009 Date of Judgment:2017-04-26 Reported As: 2017 PTD 1303, 2017 SCMR 1006, 2017 SCP 892, PTCL 2017 CL. 646 Result: Order accordingly
JUDGMENT
JUDGMENT: MR. CHIEF JUSTICE MIAN SAQIB NISAR.--(1). The key issue before us is the scope of Section 79 of the Income Tax Ordinance, 1979 (as it stood prior to the Finance Act, 1992, hereinafter referred to as the Ordinance, 1979) and whether it was applicable to the taxpayers in the instant matters. 2. The factual background is that Squibb Pakistan (Pvt.) Ltd.(appellant in Civil Appeals No, 622 and 623 of 2008, hereinafter referred to as "Squibb Pakistan') and Syngenta Pakistan Ltd. (respondent in Civil Appeals No, 1403 and 1404 of 2009, hereinafter referred to as "Tangent Pakistan') were resident companies (registered in Pakistan) engaged in the import, manufacture and sale of pharmaceutical products. They imported pharmaceutical raw material from their parent companies (foreign companies), namely M/s Bristol-Myers Squibb International, USA ("Squibb International') and M/s Ciba Geigy, Basel, Switzerland ("Ciba Geigy') respectively. Their assessm ents (assessm ent years of 1989-90 and 1990-91 for Squibb Pakistan and 1990-91 and 1991- 92 for Syngenta Pakistan) were finalized by making additions under Section 79 of the Ordinance, 1979 on account of the difference between the price of raw material imported by the companies from their parent companies and that imported by some other companies from other sources. In Civil Appeal Nos, 622 and 623 of 2008, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition followed by the deletion thereof by the learned Income Tax Appellate Tribunal (Tribunal). The respondent's income tax appeal was allowed by the learned High Court vide impugned judgment and the addition was upheld by relying upon Messrs Cynamid (Pakistan) Ltd., Karachi Vs. Commissioner of Income Tax, Companies-II, Karachi (2007 PTD 1946). Leave was granted on 10.7.2008 to consider the "applicability of Section 79 of the Ordinance". As regards Civil Appeal Nos, 1403 and 1404 of 2009, upon the respondent's appeal before the CIT(A),
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the additions were deleted for decision afresh, and the learned Tribunal upheld the deletion. In the department's appeal before the learned High Court, the deletion of the addition was upheld, but the Court incorrectly relied upon its earlier order passed in ITA Nos, 1114 and 1115 of 1999 (ITAs in Civil Appeals No, 622 and 623 of 2008) which were decided in favour of the department. Leave was granted on 3.12.2009 on the basis of the aforementioned leave granting order dated 10.7.2008. 3. The submissions of the learned counsel for the appellant (in Civil Appeals No,622 and 623 of 2008) were to the effect that as per the assessment order, Squibb Pakistan imported two pharmaceutical raw materials, i,e, epinephrine and amoxicillin hydrate, for use in its final pharmaceutical product(s) from its parent company at a higher value than that paid for the same products by other companies, warranting addition under Section 79 of the Ordinance, 1979; however, in order for the Assessing Officer to rely on these comparisons such cases had to be proved to be parallel in nature and complete details thereof should have been provided. Comparison between two persons/entities in dissimilar situations would be violative of Article 25 of the Constitution of the Islamic Republic of Pakistan, 1973 (the Constitution). The disparity in the prices of the raw material was due to the superior nature and quality of the raw material of the parent company as it incurred huge expenditure on account of research and development to ensure the efficacy and safety of the products; there was no manipulation and arranged dealing between the resident and nonresident companies as required by Section 79 of the Ordinance 1979, and nor was there a reduction, depletion or extinction of profits in the business as the pharmaceutical products were eventually sold at a price higher than similar products of other companies; and that the learned High Court had erred in relying upon the Cvnamid case (supra) which was not the correct law. In support of his arguments, learned counsel relied upon the cases reported as Commissioner of Income-Tax Vs. Pfizer Laboratories Ltd. (1989 PTD 612), Commissioner of Income-Tax, Central Zone A', Karachi Vs. Glaxo Laboratories (Pakistan) Limited, Karachi (1991 PTD 393) and the judgment dated 21.4.1992 passed in Civil Appeal No, 237-K of 1991 titled Glaxo Laboratories (Pakistan) Limited Vs. Commissioner of Income-Tax. Learned counsel for the respondent (in Civil Appeals No, 1403 and 1404 of 2009) adopted the aforesaid arguments stating that undoubtedly the fate of his cases depended upon that of Civil Appeal Nos, 622 and 623 of 2008. 4. The collective arguments of the learned counsel for the department (in all the cases) were that by purchasing raw material from their non-resident parent companies at a price higher than charged by other sources for similar products, the resident companies were liable to have profits added to their assessm ent order(s) in terms of Section 79 of the Ordinance, 1979. 5. Heard. A perusal of Cynamid's case (supra) relied upon by the learned High Court in the impugned judgments reveals that in paragraph No, 5 of the aforementioned judgment, the learned High Court extracted eight principles while relying upon five judgments, three of the Appellate Tribunal {[1988 PTD (Trib) 447], Smith Kline and French of Pakistan Ltd. Vs. IAC Range-I, Companies- II, Karachi [ITA No, 2202/KB of 1987-88] and Messrs Bayer Pharma (Pvt.) Ltd [ITA No, 1796/KB of 1993- 94, dated 14-9-1994]} and the judgments of the learned High Court of Sindh and this Court in the case of Glaxo Laboratories (supra). Suffice it to say that first, the judgments of the Tribunal are not binding on the learned High Court, which should have provided reasons for its findings based on proper application of mind. Furthermore, both Glaxo Laboratories cases (supra) by the learned High Court and this Court do not in any manner lay down the eight principles extracted by the learned High Court in Cynamid's case (supra) which to our mind is not good law. Besides, this Court's order in Glaxo Laboratories case (supra) is a leave refusing order which is not the law enunciated by this Court. 6. In consequence of the weaknesses noted in the case of Cynamid (supra), the impugned judgments are devoid of an analytical discussion of the questions that arose for determination by
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the learned High Court in the references of these cases before it. We have already noted that questions of law arising in these cases involve, inter alia, the interpretation of statutes and ascertaining the penitentiary requisites for a finding recorded under Section 79 of the Ordinance, 1979. The different aspects of these matters are not clearly identified in the judgments of the lower fora. In the circumstances a further preliminary question arises for our consideration, i,e, whether new questions not urged or examined by the lower fora can be raised in a reference filed under Section 136 ibid? In other words what is the scope of a tax reference? 7. The learned counsel for the parties made oral submissions in this context and provided case law to the Court. The judgments cited by the learned counsel are as follows, some of which are also quoted in our opinion. The judgments cited by Dr. Farogh Naseem include:- Iram Ghee Mills Ltd. Vs. Income Tax Appellate Tribunal (1998 PTD 3835), The Lungla (Sylhet) Tea Co. Ltd., Sylhetah Vs. Commissioner of Income-Tax, Dacca Circle, Dacca (1970 SCMR 872), Commissioner of Income-Tax Vs. Pakistan Beverage Company, Karachi (1967 PTD 265), Mathuraprasad Motilal and Co. Vs. Commissioner of Income Tax, Madhya Pradesh [(1956) 30 ITR 695 (Nag)" Commissioner of Income- Tax, Punjab, Himachal Pradesh and Jammu & Kashmir Vs. Chander Bhan Harbhajan Lal [(1966) 60 ITR 188 (SC)], Mountain States Mineral Enterprises Inc. Vs. Commissioner of Income Tax (Appeals) Zone-3, Karachi (PTCL 2008 CL. 448), Liquidator of Mahmoodabad Properties (P.) Ltd. Vs. Commissioner of Income Tax, West Bengal-II [(1980) 124 ITR 31 (SC), Commissioner of Income Tax, West Bengal Vs. Calcutta Agency Limited [(1951) 19 ITR 191 (SC)], Commissioner of Income-Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd. [AIR 1961 SC 1633 = (1961) 42 ITR 589 (SC)j, Messrs Pak Saudi Fertilizers Limited Vs. Commissioner of Income-Tax and others (2005 PTD 1607), Commissioner (Legal Division) Large Taxpayers Unit, Karachi Vs. Bawany Metals Ltd. Karachi (2006 PTD 2256), K S. Venkataraman and Co. (P.) Ltd Vs. State of Madras [(1966) 60 ITR 112 (SC)], C. T Senthilnathan Chettiar Vs. State of Madras [(1968) 67 ITR 102 (SC)], Bhanji Bahwandas Vs. Commissioner of Income-Tax, Madras [(1968) 67 ITR 18 (SC)], Jamunadas Mannalal Vs Commissioner of Income Tax, Bihar [(1985) 152 ITR 261 (Pat)], Mohatta Brothers Vs. Commissioner of Income Tax, Gujarat, Ahmedabad [(1985) 153 ITR 247 (Guj)], Estate of Late H H Rajkuerba, Dowager Maharani Saheb of Gondal Vs. Commissioner of Income-Tax, Karnataka [(1982) 135 ITR 393 (Kar.)], Mahamaya Dassi Vs. Commissioner of Income-Tax, West Bengal-III [(1980) 126 ITR 748 (Cal)], Addl Commissioner of Income Tax, MP., Bhopal Vs. MP Rungta [(1979) 116 ITR 245 (MP)], Amarchand Jalan Vs. Commissioner of Income-Tax, Central, Bombay [(1964) 54 ITR 18 (Bom)], Commissioner of Wealth Tax Vs. Mahadeo Jalan & Mahabir Prasad Jalan [(1972) 86 ITR 621 (SC)], Jetha Bhai Harji Vs. Commissioner of Income Tax, Gujarat, Bombay City [(1949) 17 ITR 533 (Born)], Commissioner of Income-Tax, Central Zone "A", Karachi Vs. Messrs Karachi Electric Supply Corporation Ltd. (1991 PTD 869), The Commissioner of Income-Tax, Karachi (Central Zone) Vs. Messrs Pakistan Refinery Ltd., Karachi (1984 PTD 337), Messrs Coronet Paints & Chemicals Ltd. Vs. The Commissioner of Income- Tax (Central), Karachi (1984 PTD 355), Commissioner of Income Tax Companies No, 1, Karachi Vs. M/s. Hassan Associates (Pvt.) Ltd, Karachi (1994 SCMR 1321), Mrs. Yasmeen Lari Vs. Registrar, Income Tax Appellate Tribunal (1990 PTD 967), Commissioner of Income-Tax Vs. National Refinery Ltd (2003 PTD 2020), Messrs Urooj (Pvt.) Ltd., Karachi through Chief Executive Vs. Deputy Commissioner of Income-Tax, Circle-6, Companies IV, Karachi and 2 others (2004 PTD 295), Karachi Properties Investment Company (Pvt.) Limited, Karachi Vs. Income-Tax Appellate Tribunal, Karachi and another (2004 PTD 948). Messrs G. I. M Gregory & Co. In re. [(1937) 5 ITR 12 (Cap], Commissioner of Income-Tax, Bombay City II Vs. Jadavji Narsidas & Co. [(1963) 48 ITR 41 (SC)], Praise & Co. (Private) Ltd. Vs. Commissioner of Income-Tax, West Bengal [(1966) 60 ITR 566 (Cal)], Humayun Properties Ltd. Vs. Commissioner of Income-Tax, Calcutta [(1962) 44 ITR 73 (Cal)], Valivetti Sriramulu Vs. Commissioner of Income-Tax, A.P. [(1970) 76 ITR 551 (AP)], Patny & Co. Vs. Commissioner of Income Tax, Bihar and Orissa, Patna [(1955) 28 ITR 414 (Oris)], Commissioner of Income-Tax, Bombay South,
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Bombay Vs. Messrs Ogale Glass Works Limited, Ogale Wadi [AIR 1954 SC 429 = (1954) 25 ITR 529 (SC)] and Jesrajah Jiwanram Vs. Commissioner of Income-Tax, Assam [(1953) 24 ITR 245 (Assam)]. The judgments referred to by Mr. Makhdoom Ali Khan are:-- The Commissioner of Income-Tax, Lahore Zone, Lahore Vs. Messrs Shaikh Muhammad Ismail & Co. Ltd. (1986 SCMR 968), Commissioner of Income Tax, Central Zone, Lahore Vs. Capt. (Retd.) Gohar Ayub Khan (1995 PTD 1074), The Commissioner of Income-Tax, Lahore Vs. Messrs Immion International, Lahore (2001 PTD 900), Messrs Nafees Cotton Mills Ltd., Lahore Vs. Income-Tax Appellate Tribunal, Lahore and 2 others (2001 PTD 1380), Ghulam Mustafa Jatoi, Karachi Vs. Commissioner of Income Tax, Central Zone-B, Karachi (2006 PTD 1647), Messrs. Superior Steel, Karachi Vs. Commissioner of Income-Tax, Zone-D, Karachi and another (2007 PTD 1577), Mountain States Mineral Enterprises (supra), Commissioner Inland Revenue, Legal Division, Bahawalpur Vs. Zulfiqar Ali (PTCL 2013 CL. 124), Commissioner of Income-Tax/Wealth Tax, Multan Vs. Messrs Move (Pvt.) Ltd., Multan (2013 PTD 2040), Commissioner Inland Revenue Vs. Messrs Pak Arab Pipe Line Company Ltd. (2014 PTD 982), Commissioner of Income-Tax/Wealth Tax Companies Zone Vs. Ms. Fahmida Hamid (2015 YLR 1167), Commissioner (Legal) Inland Revenue, Large Taxpayer Unit Vs. Messrs Shield Corporation Ltd. (2015 PTD 2275), Commissioner Inland Revenue, Zone-II, Regional Tax Office-II Vs. Messrs Sony Traders Wine Shop (2015 PTD 2287), Commissioner Inland Revenue, Multan Vs. Messrs Bank Al-Habib Ltd. (2016 PTD 2548), Central Exchange Bank Ltd., Lahore Vs. The Commissioner of Income Tax, Lahore (PLD 1954 Lah 439), Messrs Muhammad Idrees Barry & Co. Vs. The Commissioner of Income-Tax, Punjab and NWFP (PLD 1959 SC 202), Abdul Ghani & Co. Vs. Commissioner of Income-Tax (PLD 1962 Kar 635), Messrs Odeon Cinema, Lahore Vs. The Commissioner of Income-Tax, Lahore Zone, Lahore (1971 PTD 212), Ahmad Karachi Halva Merchants & Ahmad Food Products Vs. CIT, Karachi (1982 SCMR 489), The Commissioner of Income-Tax (Central), Karachi Vs. Messrs Haji Moulabux & Sons (1987 PTD 492), The Commissioner of Income-Tax, Rawalpindi Vs. Sh. Ghulam Hussain (2001 PTD 1419), Commissioner of Income-Tax, Rawalpindi Vs. Haji Mukhtar & Company (1980 PTD 415), Haji Ibrahim Ishaq Johri Vs. The Commissioner of Income Tax (West), Karachi (1993 PTD 114), Messrs Irum Ghee Mills Limited Vs. Income-Tax Appellate Tribunal and others (2000 SCMR 1871), Commissioner Inland Revenue Vs. Messrs Macca CNG Gas Enterprises and others (PTCL 2015 CL. 540), Hassan Associates (supra), Commissioner of Income-Tax, Rawalpindi Vs. Messrs Rural Food Products, Rawalpindi (2001 PTD 2306), Commissioner of Income-Tax Companies, Lahore Vs. Crescent Art Fabric Limited, Lahore (2001 PTD 2553), Dr. Mukhtar Hassan Randhawa Vs. Commissioner of Income-Tax, Coys Zone-I, Lahore (2001 PTD 2593), Commissioner of Income-Tax, Companies-I, Karachi Vs. Messrs National Investment Trust Ltd., Karachi (2003 PTD 589), Commissioner of Income-Tax, Rawalpindi Vs. Mst. Shakeela Bano (2002 PTD 1209), Messrs Hong Kong Chinese Restaurant, Main Boulevard Gulberg, Lahore Vs. Assistant Commissioner of Income Tax, Circle 6, Lahore and another (2002 PTD 1878), Commissioner of Income-Tax, Companies Zone-II, Karachi Vs. Messrs Sindh Engineering (Pvt.) Limited, Karachi (2002 SCMR 527), National Refinery Ltd. (supra), Messrs Qadri Cloth House, Lahore Vs. Income Tax Appellate Tribunal, Lahore and 2 others (2005 PTD 2430), Messrs F. M Y Industries Limited Vs. Deputy Commissioner Income Tax and another (PTCL 2014 CL. 686) and Punjab Mineral Development Corporation Ltd. Vs. Commissioner of Income Tax (2015 PTD 2522). The issue of whether new questions can be raised before the High Court in a reference has been the subject of substantial debate ever since a provision for reference to the High Court on questions of law was introduced in the sub-continent in the early 20th century. Over the years, judicial opinions have been inconsistent and there has been considerable divergence, both, in the Pakistani as well as Indian jurisdictions. In India, the issue was strongly contested and numerous conflicting judgments were delivered from time to time. The Indian Supreme Court came down in the Scindia Steam case (supra) in favour of a restrictive view but the legislature intervened and the
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law was amended in 1998 to provide for direct 'appeals' to the High Court in place of 'references' on questions of law, the scope of the former being much wider. In Pakistan, however, as explained infra, the issue can still be said to be open as there is no authoritative pronouncement of the Supreme Court in relation to the scope of Section 133 of the Income Tax Ordinance, 2001 (the Ordinance, 2001) as it stands today. 8. In order to appreciate the scope of a reference under Section 133 of the Ordinance, 2001, it is necessary to firstly examine the history and background of the provision and how it, and its predecessor provisions, have been interpreted by the Courts. A provision for a reference to the High Court in income tax matters has been in existence in the sub-continent since at least 1918. Section 51 of the Indian Income Tax Act, 1918 (the Act, 1918) provided for a statement of case by the Chief Revenue Authority to the High Court. It read as under: (1) If in the course of any assessment under this Act or any proceeding in connection therewith other than a proceeding under Chapter VII, a question has arisen with reference to the interpretation of any of the provisions of this Act or of any rule thereunder, the Chief Revenue- authority may, either on its own motion or on reference from any Revenue-officer subordinate to it, draw up a statement of the case, and refer it, with its own opinion thereon, to the High Court, and shall so refer any such question on the application of the assessee, unless it is satisfied that the application is frivolous or that a reference is unnecessary. (2) If the High Court is not satisfied that the statements contained in the case are sufficient to enable it to determine the questions raised thereby, the Court may refer the case back to the Revenue-authority by which it was stated, to make such additions thereto, or alterations therein, as the Court may direct in that behalf (3)The High Court upon hearing of any such case shall decide the questions raised thereby, and shall deliver its judgment thereon containing the grounds on which such decision is founded, and shall send to the Revenue-authority by which the case was stated, a copy of such judgment under the seal of the Court and the signature of the Registrar, and the Revenue-authority shall dispose of the case accordingly, or, if the case arose on reference from any Revenue-officer subordinate to it, shall forward a copy of such judgment to such officer who shall dispose of the case conform ably to such judgment. (4) Where a reference is made to the High Court on the application of an assessee, costs shall be in the discretion of the Court. Under Section 51 of the Act, 1918, in brief, if in the course of assessment or any connected proceedings, a question of interpretation of any provision of the Act or rule made thereunder arose, the Chief Revenue Authority was empowered, on its own motion or on reference from any subordinate officer or on the application of an assessee, unless the application to its satisfaction was frivolous, to draw up a statement of the case including its own opinion and refer it to the High Court. The High Court, if dissatisfied with the statement of the case to the extent that it did not enable it to answer the questions referred, could refer the matter back to the Authority to make such additions and alterations as desired by the High Court. Upon hearing the case, the High Court was bound to answer the questions referred and deliver its judgment thereon containing the grounds for the decision, and send it to the Revenue Authority to dispose of the matter accordingly. Thus the dispositive power remained with the Revenue Authority, although only in accordance with the opinion of the High Court. 9. Under the Act, 1918, the jurisdiction of the High Court in income tax matters was very restrictive. There was no right of any kind, either by way of appeal or revision or review or reference, to challenge before the High Court any order passed by the revenue authorities. The legal remedy which was made available related to the stage prior to passing of an order. A power was conferred on the Chief Revenue Authority either on his own or on the request of the assessee to refer any
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questions of interpretation of the Act or the Rules to the High Court and the High Court simply gave its legal opinion, which was applied by the Revenue Authority in the course of assessment or related proceedings. As observed earlier this power was to be exercised prior to the passing of an order. 10. The scope of the High Court jurisdiction in a reference under Section 51 of the Act, 1918 came under consideration before the Privy Council in the case of Tata Iron and Steel Company Ltd. Vs. The Chief Revenue Authority of Bombay (AIR 1923 PC 148). In this case, the High Court had passed a judgment in a reference under Section 51 of the Act, 1918 against which an appeal was filed before the Privy Council with the leave of the High Court of Bombay. A preliminary objection was raised by the respondent to the effect that no appeal lay against the judgment under Section 51 ibid as the same was merely advisory in nature. The Privy Council observed that there was no express right of appeal provided anywhere against a judgment under Section 51 ibid but a general right of appeal existed under Clause 39 of the Letters Patent of the High Court of Bombay to challenge any "final" judgment, decree or order passed by the High Court in exercise of its original jurisdiction. The Privy Council then went on to examine whether a judgment passed under Section 51 ibid qualified as a "final" judgment. The Privy Council held that the judgment under Section 51 ibid was not a judgment as understood by Clause 39 of the Letter Patent as it was not a decision obtained in an "action". The Privy Council observed that the judgment under Section 51 ibid could at best be an order and went on to examine whether it could be said to be a "final" order or only advisory. Certain observations of the Privy Council and its finding in this regard are reproduced below: "One must therefore ask oneself what is the nature and character of the acts which Section 51 of the Income Tax Act authorities and empowers the High Court to do. The opinion of the Revenue Authority thus dominates and conditions the right of the assessee. Again it is the duty of the Revenue Officer to make the assessment, and it is in the "course" of making it the question which may be referred must arise... This last provision merely means that the Revenue Officer, in proceeding with the work in the course of which he was engaged when the question referred arose, shall be guided by the decision given, and shall make his assessm ent accordingly - the ultimate result being that he assesses the taxpayer at an amount which in his instructed opinion he judges to be right. No suit can be brought to set-aside or modify the assessm ent when so made. The amount of the taxpayers' liability is thus definitely fixed, but nothing more is done. The decision of the High Court does not in any way enforce the discharge of that liability. It would appear clear to their Lordships that the word "judgment" is not here used in its strict legal and proper sense. It is not an executive document directing something to be done or not to be done, but is merely the expression of the opinions of the majority of the judges who heard the case, together with a statement of the grounds upon which those opinions are based... It does not appear to their Lordships that the fact that the functionary who states a special case for the opinion of the Court is or is not bound to act upon it necessarily determines whether the order and decision of the Court is or is not merely advisory. In order to determine whether an order made by a Court on a case stated is final or merely advisory it is necessary to examine closely the language of the enactment, whether statute, rule or order, giving the power to state a case. When a case is stated for the "opinion" of the Court, that word would serve prima facie to indicate that the order made by the Court was only advisory. Where the case is referred for the "decision" or "determination" of a question, there is a prima facie difficulty in holding that the order embodying this determination or decision is advisory, but the use of these words or one of them is not decisive... It would appear to their Lordships that having regard to the authorities cited, and for the reasons already stated the decision, judgment or order made by the Court under Section 51 of the Income
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Tax Act in this case, was merely advisory, and not in the proper and legal sense of the term final, and thus so far as these considerations are concerned that the appeal is incompetent." 11. From the above reproduced extracts, it is clear that the structure of the reference provision as it stood at the time was the determinative factor in the case. The Privy Council found support for its finding that the jurisdiction was "advisory" from the fact that questions which were to be referred under Section 51 ibid were those which arose…
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