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Petitioner: Pepsi-Cola International (Pvt.) Limited VS Respondent: Federation of Pakistan & others
Court Name: Lahore High Court Judge(s): Shahid Karim Title: Pepsi-Cola International (Pvt.) Limited vs Federation of Pakistan & others Case No.: W.P No.24827 of 2012 Date of Judgment:2016-12-19 Reported As: 2016 LHC 3753 Result: Petitions allowed
Judgment Shahid Karim, J:- This judgment shall also decide connected petitions W.P 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 PepsiCo. 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 PepsiCo. 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 PepsiCo. 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 PepsiCo. Inc. It has
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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) essenti ally 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 Concent rate 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 franchise rs 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 separate1 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 , legalit y and constitutionality of two Show Cause Notices dated 31.08.2012 issued by the Inland Revenue Department.
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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.2,587,471,86 5/- 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
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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 Councils: 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 section 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 1 1 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 & 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:
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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 & 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 base d 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 SRO No.777(I)/201 1 dated 19.8.201 1. Those powers are listed in column III of the table in SRO 777. The Directorate General (Intelligence & 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 of ficers.
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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 sub- section (1) of section 12 of the Act, 2005. Sub-section (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,…
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