Case Summary & Legal Holding

This judicial decision was delivered by the KARACHI-HIGH-COURT-SINDH. The matter involves proceedings between INDUS MOTOR COMPANY LIMITED and FEDERATION OF PAKISTANHonorable Justice Muhammad Junaid GhaffarRashid Anwar and Aadil Saeed,Dr. Shah Nawaz Memon, Khalid Rajpar, Sardar Muhammad Ishaque, Muhammad Khalil Dogar, officially reported as 2026 PTD 555. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.

Full Judgment Text & Judicial Ruling

2026 P T D 555 [Sindh High Court] Before Muhammad Junaid Ghaffar and Agha Faisal, JJ Messrs INDUS MOTOR COMPANY LIMITED Versus FEDERATION OF PAKISTAN and others C.P. No.D-1372 of 2018 (and other connected cases), decided on 17th July, 2023. Customs Act (IV of 1969)--- ----Ss. 25(2)(d)(e) & 196---Reference---Transactional value---Determination---Royalty and license fee---Pendency of matter before High Court---Dispute was with regard to issuance of show-cause notice by authorities to applicant / importer for adding payment of technical/royalty fee to its supplier in transactional value of imported goods---Show-cause notice in question was issued during the pendency of Special Customs Reference Application (SCRA) already pending before High Court on similar question wherein authorities were restrained to pass any final order in the proceedings pending before them---Validity---Based on the expressions employed in agreements in question, neither it was established that royalty and license fees in question relating to the goods valued was paid to the buyer either directly or indirectly, nor it was a condition of sale of goods valued---Royalty fee in question was not liable to be added to customs value determined in terms of S. 25(1) read with Ss. 25(d) & 25(e) of Customs Act, 1969---Show-cause notice in question for subsequent imports was based squarely on the same issue, which was before High Court by way of SCRA against the orders passed by Custom Appellate Tribunal, in favour of applicants / importers and authorities still intended to pass similar orders, disregarding the Tribunal s order in question--- Resort to statutory remedies below the Customs Appellate Tribunal level were a mere formality, as the Tribunal s order itself was before High Court in SCRA and had not been decided---High Court declined to dismiss the Reference Application as not maintainable---High Court quashed show-cause notice in question---Reference was disposed of accordingly. Honda Atlas Cars (Pakistan) Ltd. Lahore v. Collector (Appeals) Customs, Lahore 2012 PTD (Trib.) 649; Ghandhara Nisan Ltd. v. Collector of Customs (APPG), Karachi and another 2008 PTD 1610; Assistant Collector Customs and others v. M/s Khyber Electric Lamps and 3 others 2001 SCMR 838; 2006 PTD 978; 2004 PTD 1449; 2005 PTD 950; 2006 PTD 2237; 2003 PTD 2020; 2004 PD 295; 2023 PTD 527; Amtex Limited v. Customs Excise and Sales Tax Appellate Tribunal 2011 PTD 602; Al-Tech Engineers and Manufacturers v. Federation of Pakistan and others 2017 SCMR 673; Messrs Clariant Pakistan Limited v. Collector of Customs (Appeals), Karachi and another 2004 PTD (Trib.) 2712; Honda Atlas Cars Pakistan Limited v. Appellate Tribunal and 2 others 2021 PTD 1947; Collector of Customs, Bombay v. M/s. Maruti Udyog Ltd., Gurgaon (1989 (22) ECR 482 (S.C.), Commissioner of Customs, New Delhi v. Prodelin India (P) Ltd. (2006) 10 SCCR 280; Commissioner of Customs (Port), Kolkata v. J.K. Corporation Limited (2007) 9 SCC 401, Commnr. of Customs (Port), Chennai v. Toyota Kirloskar Motor (Pvt.) Ltd. (2007) 5 SCC 371; Commissioner of Customs v. Ferodo India (Pvt.) Ltd. (2008) 4 SCC 563, WEP Peripherals Ltd. v. Commissioner of Customs, Chennai (2008) 4 SCC 561; Indusind Media and Communications Ltd. v. Commissioner of Customs, New Dehli AIR 2019 SC 4812; Commissioner For The South African Revenue Service v. Delta Motor Corporation (Pvt) Ltd. (2002) ZASCA 114; 1991 (55) ELT 15 (Bom.); 20 1995 (76) ELT 481 (S.C.); 1987 (28) ELT 390 (Tri.Delhi); 1989 (22) WCR 482 (SC); (2006) 10 SCC 280; (2007) 9 SCC 401; (2007) 5 SCC 371; (2008) 4 SCC 563; 27 MANU/SASC/0015/2002 or (2002) ZASCA 114; CIT v. National Refinery Limited 2003 PTD 2020; CIT v. Gohar Ayyub Khan 1995 PTD 1074; Iram Ghee Mills (Pvt.) Ltd. Lahore v. Income Tax Appellate Tribunal, Lahore 1998 PTD 3835; Engro Vopak Terminal Ltd v. Pakistan 2012 PTD 130 and Dr. Zafar Sajjad v. CIR 2022 PTD 109 ref. Rashid Anwar and Aadil Saeed for Petitioners. Dr. Shah Nawaz Memon, Khalid Rajpar, Sardar Muhammad Ishaque, Muhammad Khalil Dogar, Waqar Ahmed Maitlo, Khalid Mehmood Siddiqui, Muhammad Bilal Bhatti, Munawwar Ali Memon, Masooda Siraj, Fozia M. Murad, Zuhaib Ahmed, Muhammad Idrees Jakhrani, Bushra Zia for Muhammad Zubair, Pervaiz Ahmed Memon, Syed Mohsin Iman, Touqeer Ahmed Seehar, Hafeezullah, Muhammad Aqeel Qureshi, Jazib Aftab, Shumaila, Qazi Ayazuddin Qureshi (Assistant Attorney General) and Syed Zain-ul-Abdin, Deputy Commissioner, SRB for Respondents (in Petitions). Munawwar Ali Memon, Masooda Siraj and Syed Mohsin Imam for Applicants (in SCRAs). Dr. Muhammad Farogh Naseem, Ahmed Hussain, Khalid Jawed Khan, Hanif Faisal Alam, Uzair Qadir Shoro and Umer Akhund for Respondents (in SCRAs). Dates of hearing: 20th February, 6th, 7th and 8th March, 2023. JUDGMENT MUHAMMAD JUNAID GHAFFAR, J.---In all the listed cases a common legal question1 is involved; hence, they have been heard together and are being decided through this common judgment. Insofar as Constitution Petitions are concerned they have been filed impugning various show-cause notices issued by the Customs department on the ground that the law point already stands decided by the Customs Appellate Tribunal against which SCRA s are pending, and therefore, the exercise carried out by the department is against the law and the judgment of the Tribunal. In all petitions, on this ground department has been restrained from passing any final orders. In fact, the fate of the Special Customs Reference Applications ( SCRA ) filed by the Department will decide the fate of all petitions filed by the Respondents in these SCRA s. For ease and convenience and with the consent of Counsel for contesting parties SCRA Nos.243 of 2008 was dealt with as the leading case. Following is the detail of the SCRA s and Constitutional petitions along with the details of show cause notice(s); Order(s) in Original and the Order(s) in Appeal. STATEMENT SHOWING DETAILs OF SCRAs

Sr. No.

SCRA Nos.

Impugned Order

Customs Appeal No.

Show-Cause Notice

Order-in-Original Dated

1

243/2008 (Indus Motors)

9-4-2008

K-512/2006

2-2-2006

2-9-2006

2

242/2008 (Dewan Farooq)

9-4-2008

K-80/2006

28-8-2006

18-9-2006

3

125/2008 (Dewan Farooq)

9-4-2008

H-161/2008

27-3-2007

12-9-2007

4

287/2008 (Dewan Farooq)

10-3-2014

H-707/2009

2-3-2009

19-10-2009

5

288/2014 (Dewan Farooq)

10-3-2014

H-706/2009

20-7-2009

19-10-2009

6

289/2008 (Dewan Farooq)

10-3-2014

H-156/2008

27-3-2007

7-2-2008

DETAIL(S) OF CONSTITUTIONAL PETITIONS

Sr. No.

Const. Petition Nos.

Parties Names

Date of impugned SCN

1.

C.P. No.D-1372 of (sic)

M/s Indus Motors Co. Ltd. v. FOP

9-2-2028

2.

Const. P.1410/2018

M/s Indus Motors Co. Ltd. v. FOP

9-2-2018

3.

Const. P. 1665/2020

M/s Indus Motors Co. Ltd. v. FOP

2-3-2020

4..

Const. P. 3593/2021

M/s Indus Motors Co. Ltd. v. FOP

19-5-2021

5.

Const. P. 4807/2021

M/s Indus Motors Co. Ltd. v. FOP

26-7-2021

6.

Const. P. 4808/2021

M/s Indus Motors Co. Ltd. v. FOP

26-7-2021

7.

Const. P. 7372/2021

M/s Indus Motors Co. Ltd. v. FOP

15-12-2021

8.

Const. P. 56/2022

M/s Indus Motors Co. Ltd. v. FOP

28-12-2021

9.

Const. P. 868/2022

M/s Indus Motors Co. Ltd. v. FOP

28-12-2021

2. Through SCRA s at Serial Nos.1 to 3 an identical order dated 9.4.2008 passed separately by the Customs Appellate Tribunal, at Karachi, in 3 different Appeals (K-512 of 2006; K-80 of 2006 and H-161 of 2008) has been impugned by the Applicant Department under Section 196 of the Customs Act, 1969 ( Act ). Insofar as the remaining SCRA at Serial Nos. 4 to 6 are concerned, the same have been decided by the Tribunal by following its earlier order dated 9.4.2008, Though various questions of law had been proposed on behalf of the Applicant; however, the same are neither properly drafted, nor are in any manner strictly questions of law, but appears to be argumentative; therefore, they need to be rephrased at the conclusion of this opinion. 3. Mr. Munawar Ali Memon, Applicants Counsel in SCRA No.125 of 2008 (The Collector Customs, Hyderabad v. Dewan Farooq Motors Ltd.,) while pressing upon proposed Question Nos.(i)2 and (iv)3 has contended that the Tribunal was not justified in passing the impugned order; that the Royalty / Technical Fee has been agreed upon to be paid to the shipper / supplier in terms of Clause(s) 1.4 and 5.2 of the Technical Licence Agreement; ( TLA ); hence, the same was required to be added to the Transactional Value of CKD Kits imported by the Respondents in terms of Section 25(2)(d) and (e) of the Act; that the said amount was being admittedly reimbursed to the shipper / franchisor, and therefore, was required to be added to the transactional value of the imported goods in terms of the provision ibid; hence, the impugned order(s) are liable to be set-aside and the proposed questions be answered in favour of the Applicants. He has relied upon judgment of the Customs Tribunal reported in the case of Honda Atlas Cars (Pakistan) Ltd.4 Mrs. Masooda Siraj appearing for the Applicant in one of the SCRA s has referred to Article 16 of the Agreement and has argued that payment / reimbursement of this amount was never disclosed to the department, hence, a show-cause notice was issued after conducting post clearance audit; that this amount is to be added to the transactional value of the imported goods of the Applicant. In support she has also relied upon the case of Honda Atlas Cars (Supra) and Ghandhara Nisan Ltd.5 4. On the other hand Dr. Farogh Naseem has led the arguments on behalf of Respondent (Indus Motor Company Limited) in SCRA No.243 of 2008 and has contended that in this case a demand was directly raised without a proper show-cause notice in violation of judgment in Khyber Electric Lamps6; that even the show cause notice issued thereafter is vague and unclear as to any allegation against the Respondent, hence it is in violation of the dicta laid down in the case of Forte Pakistan7; Exide Pakistan8 and Asia Lubricants9; that even otherwise once the goods were cleared by the Customs Authorities as is the case in hand, it is only the Directorate of Valuation which has jurisdiction to deal with the issue of valuation matters as held in the case of Pak Suzuki Motors Co. Ltd.10; that the proposed questions otherwise do not arise out of the impugned order, hence, cannot be raised in this Reference Application in view of the dicta laid down in the case of National Refinery Ltd11 and Urooj (Pvt) Ltd12; that the show cause was even otherwise time barred; that without prejudice, in view of the judgment in the case of Nestle Pakistan Limited13, no recovery of Sales Tax and Income Tax can be made by the Customs Department after clearance of the goods; that no fee or royalty was being paid by the Respondent to its supplier for the goods being valued, therefore, Section 25(2)(d) & (e) are not applicable; that even otherwise the provision in question was made applicable w.e.f. 01.01.2000, whereas, more than 50% of the goods in question were imported between 1997 to 01.01.2000; hence, the said law is not applicable and the value was to be determined under the previous law as was applicable in the relevant period; that neither the amount in question as mentioned in clause 16 of the Technical Agreement is in respect of any royalty or fee; nor it has any nexus with the imported goods, and is only in relation to post importation transactions and therefore cannot be added to the transactional value of the imported goods; that the amount in question has in fact nexus with the deleted parts being procured locally which are manufactured and developed through local vendors and has got no relation with the value of imported goods in question; that in terms of section 25 ibid it must be a pre-condition of sale and only then it can be added to the transactional value; lastly by placing reliance on the cited law14 he has prayed for dismissal of the Reference Application. All other Counsel appearing for respective Respondents in SCRA s have adopted the legal submissions made by Dr. Farogh Naseem. Mr. Rashid Anwar, learned Counsel for the Petitioners in addition to adopting the legal submissions of Dr. Farogh Naseem, has further argued that the payment in question in respect of royalty has no nexus with the imported goods; hence it cannot be added to the value of goods being imported, whereas, direct Petitions against show cause notice(s) are competent as after Tribunals favorable order, there was no occasion for the department to issue fresh show cause notices to the petitioner in respect of subsequent imports as the matter stands decided against them. He has therefore, prayed that all notices be quashed / set-aside. 5. We have heard all the learned Counsel and perused the record. It appears that the Respondent (Indus Motor Company Limited) in SCRA No. 243 of 2008 is an authorized agent and manufacturer of Toyota vehicles in Pakistan having a Technical Assistance Agreement since 1991 with its principal i.e. Toyota Tsusho Corporation, Japan and for such purposes, regularly imports CKD (Complete Knock Down) Kits of various models of Toyota Vehicles. It is a matter of admitted position that all the consignments in question (though not detailed in the demand notice) were released by the Applicant Department by accepting the Transaction Values under Section 25(1) of the Customs Act, 1969 ( Act ) without raising any objection. Record further reflects that on 2.2.2006 a Demand Notice was issued to the Respondent under Section 32(3) of the Act in respect of its past clearance of CKD Kits for the period starting from 1997 to November, 2005 and it was alleged that a total of Rs. 370.373 million is to be recovered on the ground that the Royalty payment of 3% pursuant to Clause 16 of the Agreement with M/s Toyota Corporation Japan read with Section 25(2)(d) & (e) of the Act, the transactional value was required to be enhanced and or added with this payment of Royalty, and as a consequence thereof, extra customs duty and taxes were to be paid. The Respondent replied to the said Notice and contested the same on various legal grounds; however, on 2.9.2006 an Order-in-Original was passed by the Collector of Customs, whereas, all the legal objections of the Respondent were dismissed and the amount mentioned in the Demand Notice was adjudicated and enforced. The Respondent being aggrieved preferred Appeal under Section 194-A of the Act and the Customs Excise and Sales Tax Appellate Tribunal Bench-I at Karachi has decided the Appeal of the Respondent along with two other Appeals of similarly placed importers cum manufacturers and has allowed the Appeals by setting aside the impugned orders. 6. Insofar as the issue in hand is concerned, there is only one legal question involved; i.e. whether the payment of Royalty pursuant to Clause 16 of the Technical Agreement is to be included in the value of the imported CKD Kits pursuant to Section 25(2)(d) & (e)15 of the Act. The learned Tribunal has been pleased to hold that it is not to be added. The question before this Court is the correct interpretation of Section 25(2)(d) & (e) of the Act read with Article 1616 of the Agreement in question. It need not be reiterated that w.e.f. 01.01.2000 Section 25 of the Act has done away with the old concept of notional / normal value or the Brussels Definition of value (BDV)17 of goods and has adopted the concept of transactional value based entirely on General Agreement on Trade and Tariff (GATT) envisaged in the World Trade Organization s Valuation Agreement concluded in the year 1995 and signed by more than 140 Countries including Pakistan. After the expiry of the grace period provided to Pakistan being a developing country pursuant to Article 20.1 of the WTO Agreement read with WTO first annual review dated 13.10.1995 for transformation to the new system, it is now effective from 01.01.2000 in Pakistan. The idea of change in the concept of Valuation of Imported Goods was an outcome of long deliberations and after successive meetings and conferences of around 124 Governments as well as the European Community participating in Uruguay Round of Multilateral Trade negotiations held in 1994, resulting in the establishment of World Trade Organization (WTO) in Geneva on 01.01.1995 and after abolition of GATT and formation of WTO for regulating International Trade, the entire GATT Code of Valuation has been incorporated as Article VII of WTO Agreement. For a better understanding, it may further be explained that Transactional Value system has in itself 6 methods of Valuation of Imported Goods which per law are to be applied in a sequential manner (except that the Importer may request that the order in which Deductive Method and Computed Method are to be applied, be Reversed-See S.25(10)). Under the Act, Section 25(1) to (4) describes and defines the Transaction Value of the Imported Goods and how it has to be determined. Subsection (5) deals with Transaction Value of Identical Goods; Subsection (6) deals with Transaction Value of Similar Goods; Subsection (7) deals with Deductive Value method; Sub-section (8) provides how the Computed Value method is to be applied; and lastly Subsection (9) explains the Fall Back or Reasonable Means Method. It may also be of relevance to note that Article 8(1)(c) of the WTO Valuation Agreement deals with the situation in hand corresponding to Section 25(2)(d) & (e) of the Act. It states that in determining the Customs value under the provisions of Article 1 (Transactional Value); there shall be added to the price actually paid or payable for the imported goods; (i) royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable; and [Article 8(1)(d)] (ii) the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller. These two have been further explained in the Notes to Article 8 in Paragraph 1(c) and states that the royalties and licence fees referred to in paragraph 1 (c) of Article 8 may include, among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the Customs value. As to Article 8(1)(d) it is provided that payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for export to the country of importation of the imported goods. 7. For the present purposes it is only section 25(2)(d) & (e) which is to be looked into and interpreted. Section 25(2)(d) provides that while accepting transactional value of the goods under subsection (1) of section 25, there shall be added to such price, the royalty and license fees relating to the goods being valued that the buyer must pay either directly or indirectly, as a condition of sale of the goods being valued to the extent that such royalty fees are not already included in the price actually paid or payable. Similarly, subsection (e) of Section 25(2) ibid further provides, that there shall also be added to such price the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller. Before proceeding further, it needs to be clarified that section 25(2) (d) and (e) of the Act altogether speak about different situation(s) and payments being made or accrued to the Supplier or Shipper. Section 25(2) (d) refers to Royalty payments, whereas, section 25(2) (e) refers to subsequent proceeds. In our considered view, they cannot be invoked or applied simultaneously at one point of time as done in the demand notice of the Applicant. Both deal with different additions of value, if any, and from the given facts we are unable to discern as to how the Applicant Department, while issuing the demand notice and passing the Order-in-Original has invoked and pressed upon both these subsections / provisions together. Neither section 25(2)(e) of the Act; nor Article 8 and its Interpretative Notes to WTO Valuation Agreement provides any assistance as to under what situation the subsequent proceeds have to be included in the value of imported goods. For the present purposes, it could be safely held that the Applicant department was by itself unclear as to invoking both these provisions as apparently their case is premised on payments of Royalty as per their own demand notice on the basis of Article 16 of the Agreement between the Respondent and their Supplier. Therefore, insofar as Section 25(2)(e) of the Act and its implication is concerned, no further discussion ought to be made, and be left to be taken up in an appropriate case having facts germane to the invocation of the said provision. However, as to the applicability of Section 25(2)(e) of the Act to the case of Respondent(s) in hand is concerned, it apparently has no nexus with clause(s) in their respective agreements as it does not provide for any payment of proceeds to the principal in respect of any subsequent resale, disposal or use of the imported goods in question. As noted earlier it is confined to the technical assistance in respect of the deleted parts and not otherwise. 8. Now we will advert to the implication of section 25(2)(d) of the Act insofar as Clause 16 of the Agreement in question is concerned. It relates to Technical Know-How Fee and Royalty and states that in consideration of the license used in technical information, know-how and data furnished by the Licensor under Article 3 hereof, the licensee shall pay Running Royalty as described in Paragraph (b) and technical fee in four installments. Sub-Clauses of Article 16(a)(i)(ii)(iii) and (iv) thereof provides further details of the vehicles and the amount so payable. Similarly, Article 16 (b) further provides that the Running Royalty has to be paid on 3% of C & F Value of the deleted parts and components commencing only after 21% of deletion has been achieved in each of the vehicle in question. We may add that in many Developing countries like Pakistan, the Government sets a level for the local auto assembler to achieve for indigenization so as to promote the local industry, and all such parts as are locally available are recognized as deleted parts of a complete CKD unit which are not imported from abroad. Moreover, their quantum or percentile has to increase gradually on a yearly basis as per the Policy. In Pakistan, such policy at the relevant time was being enforced through Engineering Development Board which required all such Manufacturers to maintain a deletion program. As noted earlier, while invoking the Section 25(2)(d) there are two conditions which must be fulfilled before the said subsection can be invoked; (i) such royalty which is being paid must relate to the goods being valued; and (ii) shall be a condition of sale of the goods being valued and such royalty must not have already been included in the price actually paid or payable. When clause 16 of the Technical Agreement is read with the aforesaid provisions of the Act, it appears that it has no nexus with the goods being valued at the import stage. The royalty refers to the deleted parts which means that when CKD Kit is being imported, it will not include value of the parts which are to be procured and manufactured locally; hence, it is not related to or has any nexus with the goods being valued which is a precondition for invoking the provision of section 25(2)(d) while making additions in the transactional value of imported goods. The royalty in question is being paid in respect of the deleted parts; hence, it has no nexus with the goods being valued. It is in fact a royalty for providing technical assistance by the Toyota Motor Corporation to the Respondent herein in respect of achieving the deletion as required under the Automobile Manufacturing Policy of the Government which has to be progressively increased as more and more local parts are to be added to the CKD Kits. The royalty, if any, is being paid for such technical assistance which is required for manufacture and procuring the deleted parts; hence, it has no nexus with the goods being valued. Such payment for technical assistance cannot be attributed to the price of the goods being valued merely for the reason that it is compensating the Supplier on account of more and more indigenization leading to decreased imports of complete CKD Kits. Therefore, insofar as Section 25(2)(d) of the Act is concerned, it has no nexus or relevance at least…

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