The captioned Federal Excise appeal has been filed by the department against order dated 26-5- 2011, passed by learned CIR (Appeals-II), Karachi in Appeal No,87 of 2011. The department has agitated following grounds:--
(i) That the order of learned Commissioner Inland Revenue (Appeals-II), Karachi is bad in law and contrary to the facts of the case.
(ii) That the learned Commissioner Inland Revenue (Appeals-II) was not justified in annulling the order on the grounds that the OIR has failed to make out a case to convert Royalty in to Franchise Fee despite the fact that the payments made were rightly classified as Franchise payment, by the OIR in the light of definition of Franchise as provided in section 2(12a) of the Federal Excise Act, 2005 read with rule 43A of the Federal Excise Rules, 2005.
(iii)That the learned Commissioner Inland Revenue (Appeals-II) was not justified in annulling the order on the basis of case-laws which relate to the chargeability of income tax on income under Income Tax Ordinance, 2001, as the F.E.D. is not levied on income but on goods and services as mentioned in the first schedule to the Federal Excise Act, 2005.
(iv)It is therefore, prayed that the order of learned CIR (A) may be vacated and that of Officer Inland Revenue Unit-12 may be restored.
(v)That the appellant craves permission to add, amend, alter, modify, etc any ground of appeal at the time of hearing or before the hearing.
2. Brief facts of the case are that the respondent/taxpayer is a company under the Income Tax Ordinance, 2001, and a person under the Federal Excise Act, 2005. The respondent/taxpayer (henceforth to be referred to as subject company) is deriving income from provision of sea port facilities and allied services. The subject company was considered liable to pay FED and for its failure to pay FED on the amount received by it as royalty from KICT LTD and PICT LTD (TOCs = Terminal Operating Companies), was proceeded against on the basis of certain issues/objections raised by the department vide show-cause notice/letter No,OIR-10/E&CDIV/KPT/2010/510, dated 21- 5-2010. The department took stand that as shown in the agreements between KPT and TOCs; KPT was receiving payments from TOCs in the name of 'royalty.; and in the light of definition of franchise in section 2(12a) of the FE Act, 2005, read with Rule 43A of Federal Excise Rules, 2005; the subject company (KPT) was required to pay FED on royalty amount received from KICT and PICT.
The subject company in response to referred show-cause notice, gave appearance through its AR and after seeking some adjournments filed reply through Ld. AR vide letter No, HY&CO/2010/ 183 dated 25-6-2010. The subject company in its reply contended that the TOCs namely KICT and PICT were conducting their business on BOT basis (Build, Operate and Transfer basis), so they cannot be called as Franchisees of KPT for various reasons with reference to their respective trade agreements with KPT. The reply given by the company was found unsatisfactory by the department and there upon for further clarification, the company was served with another notice vide letter No, TO-10/ E&CD-IV/2009-10/34 dated 10-8-2010, wherein it was explained to the subject company (KPT) that by virtue of Clause (c) of subsection (5) of section 3 of Federal Excise Act, 2005 r/w Clause-IV of Federal Excise General Order No, 5/2006 C N.1/1-STB/2006 dated 5th August, 2006; the franchisor, in the light of definition under Section 2(12a) of FE Act, 2005 is duty bound to pay FED on the royalty received in lieu of the services provided through franchisees. The matter was subsequently transferred to Audit Division-1, RTO-III, Karachi as viewed to fall within their jurisdiction on account of involving the question of determination of duty. The transferee office of Audit Division-1, RTO-III Karachi, before determining the, liability of duty under section 14(2) of FE Act, 2005, issued a notice to the subject company vide letter/notice No, DCIR Unit-2/Audit Div-1/RTO-III/ 16A/182 dated 31-1-2011, for appearance and hearing on 7-2-2011. The subject company vide notice dated 31-1-2011, was requested to furnish month wise details of royalty received from KICT and PICT during May, 2007 to December, 2010, for the purpose of correct ascertainment of FED, default surcharge under section 8 and penalty under section 19 of FE Act, 2005. However, no one attended the hearing on 7-2-2011, on behalf of subject company. To afford opportunity of being heard to the company, yet another notice was issued for hearing on 15-2-2011, vide notice/letter No, DCIR Unit- 2/Audit Div-1/RTO-III/16A/192 dated 8-2-2011. In response to this notice, the subject company through Ld. AR filed comments vide letter dated 9-2-2011, contending therein that the jurisdiction lies with enforcement division and not with audit division. On 15-2-2011, Mr. Arshad Malik of Haji Yusuf Rehmatullah and Co. the AR in this case, appeared and submitted a letter of authority in his favour to conduct the case on behalf of subject company. Ld. AR during the hearing, did not submit the required information or documents and only objected on the assumption of jurisdiction by audit division. Accordingly, the order in original bearing No, 34/7 dated 15-2-2011, was passed by DCIR Audit Unit-12, Audit Div-1, RTO-III, Karachi, whereby he held the KPT liable to pay FED and determined the amount of FED outstanding against the subject company amounting to Rs,160,378,781 as a total demand for the period; May and June 2007 @ 5% of the amount received as royalty, 2008 @ 5% of the amount received as royalty, 2009 @ 10% of the amount received as royalty and January to March 2010 @ 10% of the amount received as royalty. Taxpayer/subject company feeling dissatisfied with the order of Ld. DCIR, preferred appeal before learned CIR(A-II), Karachi, who vide impugned Order No,87 of 2011 dated 26-5-2011, allowed the appeal of the taxpayer/subject company and by annulling the order of Ld. DCIR, absolved the subject company of chargeability of FED determined by Ld. DCIR. Thus the department being dissatisfied with the impugned order of Ld. CIR(A-II), Karachi, as filed present appeal before this Tribunal on the above stated grounds.
3. While arguing, Ld. DR fully supported the order-in-original passed by Ld. DCIR on legal and factual grounds. Ld. DR conversely contended that the impugned order passed by Ld. CIR(A) is much against the law and facts. The impugned order does not contain any finding on the main point which is actually and apparently involved in this case. Ld. DR argued that the impugned order is based upon irrelevant observations of Ld. CIR(A) and misunderstanding of grounds. The correct approach of the department in the present case has not been appreciated and even slightly touched in throughout the impugned order. According to Ld. DR, the main question involved in the case is to determine, as to whether or not the amounts received by KPT as royalty for the services/facilities/rights provided and performed under the contract between KPT and TOCs fall within the purview of the definition of franchise services under section 2(12a) and thus chargeable as mentioned in Table II of First Schedule to the Federal Excise Act, 2005? Ld. DR contended that there is no exemption under the Federal Excise Act, 2005, to the government agencies which are engaged in the activity of providing excisable services. Ld. DR further contended that the subject company has been continuously changing its stance by terming the payments received by KPT under contract with TOCs as royalty, rent and handling charges, etc. etc without any substantial evidence in proof. Ld. DR argued that these confusing tactics of other side prove the departmental view as correct. The subject company (KPT) is not providing any handling services in relation to these payments. The handling services are being provided by the TOCs if any, for which they receive payments from their clients. These TOCs under the name of royalty are transmitting a share from these payments to KPT at no expenses of KPT. Therefore, in the hands of KPT, these charges are royalty/franchise fee in lieu of granting rights to TOCs for doing activity on behalf of KPT for using the berths, provisions and port facilities to provide services of loading and unloading containers to and from the ships. It has been further argued by Ld. DR that non-mention of the word 'franchise' in the contracts/agreements between KPT and TOCs only for the reason of inclusion of word royalty in these agreements/ contracts, does not impose a bar upon the department from classifying these agreements as being equivalent to Franchise agreement for the purpose of Federal Excise Act, 2005. Ld. DR contended that a contract should be construed in the light of its whole contents and not merely for certain terms inserted therein by ignoring the rules of usage and abusage. Ld. DR contended that for the purpose of determining the liability of any person under Federal Excise Act, 2005, the definition of franchise provided in the very Act is substantive and appropriate and its conventional or dictionary meaning is not applicable. Ld. DR quoted a reference of AIR 1928 Lah 325 from the volume of Sales Tax Act, 1990, 55th edition by Tariq Najeeb Choudhry, wherein it is shown to have held as under:-- - "Where word or phrase is defined in an enactment to have a particular meaning that meaning alone should be given to it notwithstanding it may bear different meanings in ordinary legal practice." (AIR 1928 Lah 325).
Ld. DR contended that in the light of definition under section 2(12a) of FE Act, 2005, it is evident that respondent/subject company has given/assigned the rights to TOCs to engage, in the business activity of providing services related to port facilities on the assigned berths of terminal and in lieu thereof the respondent/subject company has been receiving a fee from the licensees/authorized TOCs which has been referred to as 'royalty' in the business agreements between KPT and TOCs, therefore, in all the fours of law and facts, the subject company is liable to pay FED on amount received by it from TOCs as royalty. Ld. DR prayed for annulling the impugned order passed by Ld.
CIR(A) and for upholding the order in original passed by Ld. DCIR.
4. Ld. AR in turn has argued that the impugned order passed by Ld. CIR(A) is just, proper and based upon correct appreciation of law and facts. Ld. AR contended that the order in original passed by Ld. DCIR is without jurisdiction and the action of the department is time barred. The Audit Division lacked jurisdiction as the case falls within the jurisdiction, powers and domain of Enforcement 'Division. The OIR/DCIR failed to consider the reply and the contentions raised on behalf of the subject company in three detailed letters submitted by AR. The procedure laid down in Federal Excise Act, 2005 has not been followed by Ld. OIR/ DCIR. The provisions of law have been wrongly interpreted and misapplied. The notices issued were time barred. The relation between KPT and TOCs has been misconstrued as that of Franchisor and Franchisees which otherwise is exactly similar to that of a land lord and tenant. The payments received by KPT as 'royalty' cannot be equated with franchise fee and 'royalty' is not subject to FED. Ld. Ak contended that the taxpayer had never filed returns and as a non-filer its case falls under the jurisdiction of Enforcement Division and not under the Audit Division. The notice under section 46 of FE ACT, 2005, which is required to he issued, has not been issued in this case. The Information allegedly gathered through audit, has not been confronted to the taxpayer. The reply to letters filed by taxpayer in compliance of notice under section 14(1) of FE Act, 2005 was not given as required under section 14(2) ibid. The letters are not mentioned in the original order. The agreements relied upon by the taxpayer have been executed between Karachi Port Trust (subject company) and PICT and KICT {TOCs (Terminal Operating Companies)}. The PICT is stated to have built a container terminal at Karachi Port on the berths Nos, 6 to 9 at East Wharf on BOT basis and likewise other TOC namely KICT has built container terminal at Karachi Port on the berths Nos, 22, 23, 24 and 24-A at West Wharf on BOT basis. These TOCs have built the Container Terminals solely with their own money and investment and have executed an agreement with KPT to operate these terminals for 20 year's period and then to transfer its operational responsibilities/rights to KPT. Ld. AR has contended that the referred TOCs are doing business on the basis of a BOT agreement and as such cannot be called as Franchisees of KPT. These TOCs earn by charging money on the loading and unloading of containers to and from the ships standing or arrived at the terminals of Karachi Port. Ld. AR contended that the TOCs namely KICT and PICT as per their respective agreements with KPT dated 1-6-1996 and 18-6-1996, will pay 25% of their container handling income as a royalty being share of KPT on the space used by TOCs by using cranes to load and unload containers from berths to ships and from ships to berths in case the quantity handled by them is in excess of 400,000 TEUs and 450,0Q0 TEUs per annum in any calendar year. Therefore, in any case, it cannot be termed as franchise fee. The remainder of the total income is carried over by these TOCs in lieu of their investment and for adjustment of their capital invested. These TOCs as per agreement shall transfer/retain back all their movable and immovable assets along with terminals to KPT after expiry of the period stipulated in the referred agreements without any consideration i,e, for Rupee one only. Ld. AR has contended that in the relationship of a Franchiser and Franchisee, no Franchisee transfer its assets in favour of the Franchiser without consideration at the point of completion of any Franchise Agreement. Ld. AR contended that OIR/DCIR in the order in original has treated KPT as local Franchiser with reference to FED clause No,4 of General Order No,5/2006 dated 5-8-2006, which reads as under:-- "In case, where the Franchiser and Franchisee are both locally based, the liability to deposit the Franchise fee or royalty shall be upon the Franchiser."
Ld. AR on this point has contended that KICT is not a local company but it is a USA based company having its head office at Manila, Philippines. Ld. AR has contended that the income termed as royalty earned by KPT is in fact akin to the income earned through `Rent' and is therefore, subject to normal income tax if KPT is not treated exempted as a trust with charitable income. In all circumstances this kind of income cannot be subjected to FED.
Ld. AR further contended that Ld. DCIR in his order-in-original has treated 'royalty agreement' as 'franchise agreement' without giving any reason therefor, to hold the assessee as 'franchisor'. As per Ld. AR this approach of Ld. DCIR is contrary to the decision of Hon'ble Supreme Court of Pakistan reported as 2010 SCM R 1778. Ld. AR in this context also referred to and relied upon the provisions contained under section 24-A of General Clauses Act, 1897, which require every public functionary and judicial officer to decide cases after application of mind. Ld. AR went on to contend that the given definition of term "Franchise" has been inserted in the FE Act, 2005 through Finance Act, 2008, and as such the FED cannot be applied to any franchise for the Financial Year 2007. The subject BOT agreement cannot be changed into a franchise agreement. Ld. AR on this point relied upon the judgment of Hon'ble Supreme Court of Pakistan pronounced in the case of Siemens AG and reported as 1991 PTD 488.
5. In our view, above account of facts and contentions of the parties depict a wholesome picture of controversial points involved in present matter. Parties to the appeal, while conducting this case, have proceeded with their respective standpoints in a multidimensional manner. The appellant side / department, has assailed the legality of the impugned order passed by Ld. CIR (A-II), Karachi, on legal and factual grounds and as such we are required to examine the legality of impugned order on the legal as well as factual grounds. Besides, in view of the line of arguments followed by the parties in this case, we are also laden with another responsibility, requiring us thereby to weigh the legal objections raised by Ld. AR against the order in original passed by Ld. OIR/DCIR. Although, we may not be legally bound in stricto sensu, to address these contentions but owing to their legal and juridical posture, we feel ourselves under obligation to find the answers to such contentions as well, in order to do complete justice and also for a matter of propriety.
6. In order to meet the ends of justice, we are required to find the answers to all natural, logical and corollary questions arising in this case. In our humble opinion, following points for determination can be framed: (i)Whether the impugned order passed by Ld. CIR(A) is just and proper in facts and law?
(ii)Whether KPT is liable to pay FED on the royalty payments received by it from TOCs?
(iii)Whether the order in original passed by Ld. OIR/DCIR as a whole is proper and enforceable according to law?
(iv)What should be the order in present appeal?
7. In order to examine the legality of impugned order and for finding answer to first point for determination framed by us, we would be required to address the grounds raised in this appeal.
Accordingly, we tackle the grounds of appeal hereunder.
8. Taking in hand the grounds of appeal to decide the issues raised therein; we in the first instance, prefer to deal with the grounds Nos,1 and 3 jointly and simultaneously. The ground No, 2, is deferred for the time being and will be dealt with at later stage.
9. The appellant's contention in the grounds Nos, 1 and 3, is that the order of learned Commissioner Inland Revenue (Appeals-II), Karachi is bad in law and contrary to the facts of the case and Ld.
CIR(A) was not justified to annul the decision of OIR on the basis of case-laws which relate to the chargeability of income tax on income under Income Tax Ordinance, 2001, as the F.E.D. is not levied on income but on goods and services as mentioned in the first schedule to the Federal Excise Act, 2005.
10. Perusal of impugned order shows that Ld. CIR(A) has allowed the appeal by annulling the order in original on the basis of following observations:-- "it is a cardinal principle that the tax department cannot change nature of the contract intended by the parties under the pretext that the rule of interpretation of a fiscal law in this behalf is different" - CIT, Peshawar Zone .v. Siemens A.G. [PLD 1991 SC 368 = 1991 PTD 488 Supreme Court of Pakistan in CIT, Peshawar Zone v. Siemens A.G. reported as 1991 PTD 488 relying on Injunction of Holy Quran contained amongst other in Chapter Maida Verse (1) and Chapter Al-Isra'a Verse (34) to the effect that the contracting parties are bound to fulfill their contracts. And they would remain liable for any contraventions-obviously both here and hereafter. The Hon. Court also held "when two contracting parties agree to do something by mutual valid contract or intend to do so and it was not prohibited by Islam, a third party, like the Income Tax Department or for that matter the court had no powers to modify either the contract or interfere with what they intend to do with it."
Ld. CIR(A) has also observed that OIR has been failed to make out a case to treat and consider royalty into franchise fee. Royalty is not liable to FED. The payment as per contract is royalty and OIR has no power to rewrite a contract entered between two responsible contracting parties. Ld.
CIR(A) has concluded the impugned order as under:-- "I also respectfully follow the ratio of decision of Hon. Supreme Court of Pakistan, CIT, Peshawar Zone v. Siemens A.G. PLD 1991 SC 368 = 1991 PTD 488 and hold that the payments as per clear terms of the contract are ROYALTY and OIR has no power to re-write a contract entered between two responsible contracting parties. I also hold that on facts and circumstances of the case, the OIR has failed to make out a case to convert Royalty into franchise fee. Based on the above, I hold that the Officer Inland Revenue on facts and circumstances of the case and in law was not justified in taxing royalty as franchise fee and subjecting it to Federal Excise Duty. Therefore, the treatment meted out by the Officer Inland Revenue cannot be maintained and is hereby directed to accept the receipts as royalty and tax accordingly.
The appeal of the appellant succeeds."
11. We are of the humble view that in order to determine the correctness and justifiability of impugned order, we still have a need to find out the answers to following corollary questions:-- (a)Whether the act and finding of OIR/DCIR amounts to change or to rewrite the terms and conditions of the contract?
(b)Whether the act and finding of OIR/DCIR amounts to make an interpretation of the contract which is purely a judicial work and beyond his powers and domain being an administrative or executory authority?
(c)Whether the act and finding of OIR/DCIR is in conflict with or in contravention of the above mentioned judgment of Hon'ble Supreme Court?
(d)Whether the above mentioned judgment of Hon'ble Supreme Court is applicable to the present case in circumstances of law and facts?
12. In the machinery of government, an administrative department is an governmental body empowered with the authority to direct and supervise the implementation of particular laws; rules and regulations. The taxation authorities in their administrative and executory capacity are empowered to manage all the affairs related to tax collection in respect of all the taxes imposed under law, thereby taking all required steps in the manner and as provided, authorized or sanctioned by law. In the discharge of their duty and function, at times the officials/department may be thrown in a vocabulary entangle that might have come with the dark arts of tax evasion. It is not very unusual that the tax avoidance becomes one of the main objects or purposes of the parties to a contract of commercial nature. In order to avoid tax the parties try to depict the distorted picture of a transaction as to enable them for tax advantages to be obtained. This object is usually achieved by abusage of words and bending the rules and by manipulating the system in order to get desired outcome. Tax authorities in such a situation cannot be supposed to be totally ab agendo to let such situation to persist without taking any step in order to coup with and overcome the situation. Clearly one has a duty to do something about this absurd and unjust situation created due to the use of arcane terminology with obscure purpose or intent. Solution to this problem, if not clearly provided by law, is naturally found ab intra by traversing through record of the case itself or by precedents. This power is always considered admin per se in every authority.
Ld. OIR/DCIR in the present case has taken the contents of the contract between KPT and TOCs, exactly in their same, original and natural form as they stand in the very contract. Ld. OIR/DCIR has simply decided that the amount received by KPT from TOCs under the name of Royalty as shown in the contract, is subject to FED in view of the provisions of Section 2(12a) of FE Act, 2005, read with Rule 43A of FE Rules, 2005. Ld. OIR/DCIR has neither changed any word of the contract nor has he rewritten any of the terms and conditions of the contract. Therefore, our answer to the question (a) above is in negative.
13. Proceeding further to find out the answer to question (b) above, we deem it pertinent to clarify that the taxation authorities in all their tiers are administrative and executory authorities having no judicial or legislative power. Therefore, the judicial power of judicial interpretation, judicial adjudication and power to pronounce judicial verdicts is not vested in the taxation authorities. As far as the present matter is concerned, we can safely hold that the act of OIR/DCIR does neither amount to the interpretation of the contract between KPT and TOCs nor any of its words and terms.
Ld. OIR/DCIR has applied the law as it stands. To understand clearly as to what is meant by a 'contract' and the words 'interpretation of contract', we precisely describe the terms as under:--- Contract.---Contract is an agreement or set of promises creating binding tie in between two or more legal persons or legal entities on mutually agreed points to do or refrain from doing something. A valid "contract" is an agreement binding upon the parties and enforceable by law.
Contracts can be express Or implied. A contract is considered illegal if it is forbidden by law; or is of such a nature that, if permitted, would defeat the provisions of any other law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to public policy. All illegal agreements are void agreements but all void agreements may not be illegal. Where a contract is, good in substance but because of some technical defect cannot be enforced by law is called unenforceable contract. These contracts may be neither void nor voidable. A contract is called an Executory contract where one or both the parties to the contract have still to perform their obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed as an Executory contract. Avoidable contract is one, which due to some mistake or defect is not valid but able to become valid after rectification of that mistake or defect.
Interpretation of a contract.---Interpretation of a contract is purely a judicial function. The prime purposes of interpretation of any contract are to determine its legality and enforceability or to determine possibilities and eventualities arising from breach, violation, deviation, non- performance or revocation of any contract. The judicial task of interpretation of contract is meant for extracting the intention of the parties by reading between the lines of the contents of contract and to measure the quantum of their knowledge about the consequential effects of contract, of course with reference to the prime purposes of the contract. It is regulated by a set of laws, rules and precedents concerned. It includes, determining following issues:
(i) To determine as to whether the contract is valid, void or voidable according to law;
(ii) To determine the roles, rights, duties and obligations of the parties and pronounce judicial verdicts for specific performance of their respective role/part; (iii)To award damages for breach of contract.
14. In our humble opinion, the department has simply performed its duty owed by law to determine the, taxability of the payments received by KPT under the name of 'royalty payments'. Every individual, AOP and company is bound by law to account for its receipts and payments as income, earning, returns or endowments etc. The department's act does not amount to bring/introduce any change in the terms and conditions of the contract between KPT and TOCs nor does it mean to claim the accrual of any right or obligation for department on the basis of terms and conditions of the contract. The department's act is purely administrative and it has not performed any judicial act of interpretation of the contract to determine or declare the rights, duties, obligations or privileges of the parties, assigned to them or arising out from the contract and to enforce any such rights, duties, obligations or privileges upon the parties by pronouncement of judicial verdict or to make it in any way, the rule of law, etc. The taxation authorities as of their duty to break open the corporate secrete, are empowered to look into and read out the contents of any private agreement/contract to classify it for the sole purpose of determining the tax liability of the parties therein and that so specially when the parties claim any exemption or exception by relying on such agreement. The Taxation authorities, in their endeavour to classify any agreement/contract, are justified to measure, determine, translate, equalize and fix the nature or character or genre or genus of the activity/transaction shown or to be spelt out in any private agreement/contract for the sole purpose of determining the tax liability of the parties therein with respect to their capacity and activity, assigned in the said agreement/contract. Performance of the above stated acts, by the taxation authorities in their administrative capacity, cannot tantamount to a judicial act of interpretation for enforcement of contract upon the parties. Accordingly, we feel satisfied to answer the question under (b) in negative.
15.The questions (c) and (d) being interconnected, can be replied by single answer. It is seen that the decision of Ld. CIR(A) in the impugned order is based on the judgment of Hon'ble Supreme Court of Pakistan in the case of CIT Peshawar Zone v. Siemens A.G. reported as 1991 PTD 488 as well as PLD 1991 SC 368 = 1991 PTD 488. The question involved in this case before Hon'ble Supreme Court as contained in opening paragraph is as under:-- "This appeal through leave of the Court is directed against the decision of the Peshawar High Court in an Income Tax matter. Leave to appeal was granted for re-examination of the question dealt with in the impugned judgment: "whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in finding that the return on capital paid by Telephone Industries of Pakistan Limited to Siemens A.G. on the holding of the latter in the share capital of the former was not dividend within the meaning of the definition given in section 2(6-A) of the Income Tax Act, 1922.
16.The obiter dicta contained in the judgment of Hon'ble Supreme Court of Pakistan, relied upon by Ld. CIR(A) is as under:-- "ISLAMIC JURISPRUDENCE:- Contract---Rule of interpretation - Income tax authorities could not change the nature of the contract intended by the parties there to, under the pretext that the rule of interpretation of a fiscal law in this behalf is different "Page 493.
"ISLAMIC JURISPRUDENCE:---Contract-Prohibition against third party intervention in mutual contract---When two contracting parties agreed to do something by a mutual valid contract or intended to do so, and it was not prohibited by Islam, a third party, like the Income Tax Department or for that matter the Court had no power to modify either the contract or interfere with what they intended to do with it." Page 492.
17. This part of the judgment of Hon'ble Supreme Court of Pakistan is based upon the "Islamic Principle of Privacy of Contract between the Parties". In Islamic Economic System, man is encouraged to work, is free to enterprise, is entitled to earn and possess. Islam enjoins the necessary measures to ensure proper handling of one's possessions. Every individual has authority to earn, to invest and to spend. Yet in so doing he is guided by high principles to save him from going astray. An example may be sufficient to illustrate the point. Proprietors are not unreservedly free to spend their money or handle their properties, the way they please without thinking about the negative impacts of extravaganza on the society. There are certain rules of expenditure to be followed. In the words of the Qur'an, God enjoins upon the proprietor to fulfill his financial obligations towards the society or his fellow men, and to be moderate in his private spending. The principle of privacy of contract has been adopted by modern economic scientists, which in present legal terminology is known as 'Privity of Contract'. In this concept of Islamic Jurisprudence, a rule has been propounded that a person not being a party to a contract, cannot claim any right for him on the basis of such contract, nor he can claim to perform any act appurtenant there to the terms of such contract nor any person not being a party to the contract can sue the parties in a court of law for any action on the basis of the contents of such contract. The concepts of 'Privity of Contract' and 'Privy to Contract' are defined herein below with reasonable details:-- Privity of contract.---Privity of Contract refers to relationship between the parties to a contract which allows them to sue each other but prevents a third party from doing so. It is a doctrine of contract law that prevents any person from seeking the enforcement of a contract, or suing on its terms, unless they are a party to that contract. As a general rule, a contract cannot confer rights or impose obligations arising under it on any person except the parties to it. The premise is that only parties to contracts should be able sue to enforce their rights or claim damages as such. Privity of contract refers to a legally recognizable relationship between the parties to a contract or a legally recognized successive or mutual relationship to some property as happens in between the members of a family or those who have entered into a contract together. Privity is the legal term for a relationship coupled with right and power to enforce a promise or warranty. This doctrine is integral part of Islamic Contract Law which prevents other persons from seeking the enforcement of a contract, or suing on its terms, unless they are a party to that contract.
Privy to contract.---Privy as an adjective in an ordinary dictionary, means, 'informed, in the know, sharing in, aware of, party to, etc', and its antonym is uninformed. It refers to sharing knowledge of something private or secret. According to law relating to contracts, the word privy means and refers to somebody who has an interest or agency in something that also involves another party. In common legal parlance the phrase 'privy to contract' means a 'party to contract'.
18.Without the slightest doubt, we believe in the truth and perfection of entire judgment of Hon'ble. Supreme Court of Pakistan. However, with all our humbleness and extreme submission; with all vulnerabilities attached to us as a human being and our ever longing position to implore always for HIS Un-encompass-able Mercy; we are of the view that the question involved in referred judgment of Hon'ble Supreme Court of Pakistan is different than that of the question involved in present appeal. There is no proximity in the two questions and even the different laws are applicable to each one. The question involved in the present appeal before this tribunal or as it was before Ld. CIR(A), has no nexus with the concepts of 'Privity of Contract' or 'Privy to Contract'. The order passed by Ld. OIR/DCIR is not in contravention or violation of the concepts of 'privy to a contract' and 'privity of a contract'. Accordingly, in our humble view the correct answers to questions under (c) and (d) are in negative.
19. In our humble opinion, the department has simply performed its duty owed by law to determine the taxability of the payments received by KPT, under the name of 'royalty payments'.
Keeping in view our above observations, we feel satisfied to hold that the impugned order dated 26-5-2011, passed by Learned CIR (Appeals-II), Karachi in Appeal No,87 of 2011, is bad in law and contrary" to the facts of the case and Ld. CIR(A) was not justified to annul the decision of OIR on the basis of case-laws which relate to the chargeability of income tax on income under Income Tax Ordinance, 2001, as the F.E.D. is not levied on income but on goods and services as mentioned in the first schedule to the Federal Excise Act, 2005. The impugned order to the discussed extent, is inconsistent with facts and law, therefore, not sustainable up to the corresponding extent and is accordingly annulled. Thus we record our findings in affirmation to answer the issues in grounds Nos, 1 and 3 of appeal.
20.We now take up Ground No,2 of the appeal and address the issue raised therein. The appellant in this ground has raised the issue that the learned Commissioner Inland Revenue (Appeals-II) was not justified in annulling the order on the grounds that the OIR has failed to make out a case to convert Royalty in to Franchise Fee despite the fact that the payments made were rightly classified as Franchise payment, by the OIR in the light of definition of Franchise as provided in section 2(12a) of the Federal Excise Act, 2005 read with rule 43A of the Federal Excise Rules, 2005.
21.The crux of whole dispute between the parties is however, to find out answer to main question by determining as to whether or not the royalty payments received by KPT from TOCs are liable to FED. This answer, besides addressing the issue in ground No,2 of the appeal, would also decide our second point for determination. Corollary to this question is however, to determine as to whether or not, the agreements involved in this case (the agreements between KPT and TOCs) have the characteristics of a franchise agreement. The matter having been ultimately brought before this judicial forum; and in case the need is felt to have arisen and the circumstances of the case are considered so calling; and for deciding all the controversies judiciously and completely; a way has been paved for interpretation of any of the terms of the referred contract between KPT and TOCs.
We put in our humble efforts to find out just and appropriate answer to this question by applying simple logical approach.
22.The department at the initial stage started the proceedings against subject company under section 14 of FE Act, 2005 by issuing Notice under section 14(1) of FE Act, 2005, on 21-5-2010. The question was to determine as to whether or not the amounts received by KPT as royalty for the acts/services/facilities/rights provided and performed under the contract between KPT and TOCs, fall within the purview of the definition of franchise services under section 2(12a) and thus chargeable as mentioned in Table II of first Schedule to the Federal Excise Act, 2005? The taxpayer/subject company was thus proceeded against. During the course of proceedings' the department through another notice further clarified and confronted the taxpayer/subject company with the issue somehow in the words that, 'by virtue of Clause (c) of subsection (5) of section 3 of Federal Excise Act, 2005 r/w Clause-IV of Federal Excise General Order No, 5/2006 C N.1/1-STB/2006 dated 5th August, 2006; the franchisor, in the light of definition under Section 2(12a) of FE Act, 2005 is duty bound to pay FED on the royalty received in lieu of the services provided through franchisees.'
23.In order to address this issue, we intend to visit the agreement available on record by looking into its contents. The breakup of its contents is given below:--
(a) The cover/title page of this Agreement/contract contains the logo/insignia of Karachi Port Trust and APL (American President Lines) and International Container Terminal Services, Inc. The title shows the words, 'Container Terminal at Karachi Port on Existing Berths 22, 23, 24, 24A at West Wharf. Contract is named as "Implementation Agreement"; executed between 'Karachi Port Trust' on one side AND (i) American President Lines and (ii) International Container Terminal Services, Inc. on the other side. The date of execution is shown as 1-6-1996. The agreement besides some blank pages attached to title page; shows to contain 43 pages in addition to 04 pages of Index/Table of Contents. However, complete copy of the agreement is not available on record and instead the pages Nos,1, 2, 19 to 22, 35, 38 to 42 only with 04 pages of Index are placed on record. We look into these pages.
(b) The agreement dated 1-6-1996, named as "IMPLEMENTATION AGREEMENT", was executed in consequence of KPT's invitation of proposals through notice for expression of interest. KPT is shown to have had intended to setup a common user container terminal at Karachi Port on a BOT basis for design, finance, construction, development, operation and transfer of such terminal at Karachi Port. This is a tripartite agreement and an executory agreement in the form. It is executed b/w KPT on one hand and APL (a company incorporated in the State of Delaware, USA) & ICTSI (a company incorporated in the Philippines) on the other hand. The two companies on the other hand are termed as sponsors and have acted jointly as partners inter se with equal share of 50% each.
The Preamble Paragraph (C) of this agreement reads as under:--
(C) The Sponsors shall jointly setup and establish a terminal operating company as a joint venture public limited company with equal shareholding of 50% each, in accordance with the Laws of Pakistan, ("TOC") with the object of financing, constructing, developing, operating, managing and transferring the Terminal on the agreed Expiry Date. Upon the issuance of the Certificate for Commencement of Business to the TOC it will be made a party to this Agreement by virtue of execution of a Novation Agreement among the Sponsors, KPT and TOC in terms of the format attached as Schedule 10 whereupon all representations, warranties and covenants of the Sponsors in this Agreement shall be deemed, so far as applicable, to be the representations, warranties and covenants of TOC also and all duties, obligations and responsibilities of the Sponsors under this Agreement shall be transferred to and assumed by the TOC as if TOC had been a party to this Agreement as of the date of signing. Licenses and authorization needed to implement the Terminal will then-be requested by and considered for TOC only and all procurements shall be made by and for the benefit of TOC.
(Emphasis is ours)
The Preamble Paragraph (D) is worded as under:--
(D) KPT and the Sponsors desire to enter into this agreement so that the Project may be implemented in a manner which reflects close cooperation and mutual understanding between the public and private sector with a view toward providing modern, efficient, competitive and non discriminatory container handling services at Karachi Port for shipping lines, shippers, consignees and other port users in a manner consistent with the requirements of the shipping trade, government priorities and other port operations.
(Emphases is ours)
(c)Article 1.2 of this agreement provides as under: 1.2 The headings are for convenience only and shall be ignored in construing this agreement.
(d)The page 19 of agreement shows the following payments to be made by TOC to KPT: (i)Additional charges to be paid by regularly calling carriers to KPT on account of reserving berthing windows by regular carriers.
(ii)Separate Royalty in respect of handling special ships or special lifts (other than container ships/cargo) at the Terminal.
(iii)Royalty in respect of handling container ships/cargo at the Terminal. This royalty payment has been mentioned in the present case with reference to Articles 8.1 and 8.1.1, of the agreement which reads as under: "8.1 Royalty 8.11 Beginning with Commercial Operation and until the earlier of the Expiry Date or termination of this Agreement. TOC shall pay to KPT a Royalty at the rate of fifteen percent (15%) of its printed/published Container Loading/ Unloading Charge. In the event TOC actually handles containers in excess of 400,000 TEUs per annum in any calendar year, the Royalty payable in respect of those containers actually handled in excess of 400, 000n TEUs up to 450,000 TEUs per annum in any calendar year by TOC to KPT shall be at the rate of twenty percent (20%) of its printed/published Container Loading/ Unloading Charge. The Royalty payable in respect of those containers actually handled in excess of 450,000 TEUs per annum in any calendar year shall be paid by TOC to KPT at the rate of twenty five (25%) of its printed/published Container Loading/Unloading Charge."
(iv)Handling, Marshalling and Storage charge ("HMS" Charge) for containers/other specified cargo shall be payable by TOC to KPT at a unit rate of Rupees Two Hundred and Ninety two (Rs,292.00) per square meter per annum (fixed on 30-03-96), in respect of the Site. [Article 8.2.1]. Article 8.2.2 lays the indexation of 15% after every three year, in these charges.
(v)[Article 8.3 KPT Charges] 8.3.1 KPT shall have the right to continue to levy and collect the KPT Charges directly from consignees and all other users. TOC shall ensure that no cargo is released by it unless the KPT Charges are either paid to KPT in total or collected by TOC on behalf of KPT. If such Charges are collected directly by KPT, TOC shall not be held responsible for releasing such cargo unless notified in advance by KPT of any non-payment of such Charges. In any event, TOC shall not release any cargo/ container unless paid copy of the relevant KPT Wharfage Entry is available, and produced to TOC.
24. There is also another agreement available on record. By looking into its contents we find it as being of similar nature as the above one is. The breakup of its contents is given below:--
(a) The cover/title page of this agreement contains the logo/insignia of Karachi Port Trust and PMS [Premier Mercantile Services (Pvt.) Ltd.]. The contract is named as "Implementation Agreement"; executed between 'Karachi Port Trust' AND 'Premier Mercantile Services (Pvt.) Ltd.' a company incorporated in Pakistan, having its office at I.I. Chundrigar Road, Karachi. The title shows the words, 'Container Terminal at Berths 6 to 9 East Wharf Karachi Port. Contract is named as "Implementation Agreement". The date of execution is shown as 13-6-2002. The agreement besides some blank pages attached to title page; shows to contain 66 pages in addition to 5 pages of Index/Table of Contents. However, complete copy of this agreement is also not available on record and instead the pages Nos, 1, 2, 31, 32, 53 and 54 only with 04 pages of Index are placed on record. We have looked into these pages and could not detect any different point. However, a schedule is appended with this agreement which shows the substitution of TOC with another nominated company by novation of original agreement in accordance with its clause 16.3.4. The schedule contains the breakup of the charges for various related services. There is no other agreement available on record except these two. The comparison of indices of two agreements shows the same contents in both the agreements as being replica of each other except the difference of names as stated above.
25. The facts transpired from the reading of .whatever available contents of these agreements, are as under:--- (i)These agreements do not contain the names of KICT and PICT as the party to any of the agreements; (ii)These agreements are tripartite agreements in nature as the parties are KPT, Sponsors and TOCs; (iii)These agreements are executory in form and essence; (iv)These agreements are commercial in form and essence; (v)These agreements are executed in accordance with the laws of Pakistan and accordingly are subject to the Laws of Pakistan; (vi)In these agreements KPT has acted as principal party as executing party No,1 of the first part of the agreements; (vii)In these agreements KPT has acted as a Right conferring/ assigning/transferring party; (viii)In these agreements some authority and certain rights are conferred/assigned/transferred by KPT to the parties of other part/second part of the agreements; (ix)In these agreements the 'Sponsors' have been replaced by `TOCs' thereby removing the Sponsors to obliqueness and converting these agreements to be in between KPT and TOCs; (x)In these agreements licenses and authorization needed to implement the Terminal are issued by KPT for TOCs and only TOCs are assigned certain duties, obligations and responsibilities appurtenant thereto; (xi)These agreements are time specific as executed for specified time;
(xii) The `TOCs' in these agreements are the companies created and formed under the laws of Pakistan as per Preamble of these agreements, which stipulates, "The Sponsors shall jointly setup and establish a terminal operating company as a joint venture public limited company with equal shareholding of 50% each, in accordance with the Laws of Pakistan, ("TOC") with the object of financing, constructing, developing, operating, managing and transferring the Terminal on the agreed Expiry Data. Upon the issuance of the Certificate for Commencement of Business to the TOC it will be made a party to this Agreement by virtue of execution of a Novation Agreement among the Sponsors;
(xiii) These agreements are for the purpose of some business activity;
(xiv) The logo/insignia of KPT is used in the agreement and its use is not prohibited by TOCs who may be using the KPT logo at the terminal;
(xv) KPT is receiving/earning various amounts as rents, leases, "HMS Charges" and others including the Charges as Royalty, under the name of "KPT Charges";
(xvi) KPT has right to collect its charges by itself or TOCs can collect these KPT charges on behalf of KPT, if so assigned by KPT in lieu of mutually agreed collection charges;
(xvii) The activity of container handling is termed as services at Karachi Port for shipping lines, shippers, consignees and other port users; (xviii) The headings used in the agreements are for convenience only and shall be ignored in construing the agreement. [Article 1.2]
(xix) The perusal of the Index of first agreement shows that it also contains the terms/clauses regarding commercial operations, container handling charges, container loading/unloading charges (both are separately described), grant of rights, prescribed fee, technical and financial information, Approvals of KPT, support of KPT, competitive business, other dedicated container terminals, stevedoring services outside terminals, operation and maintenance, KPT support, KPT Act, KPT representative, inventory, termination, transfer, etc. etc. The details under these headings however, are given on the pages of the agreements which are not available on record.
26. Admittedly the above breakup of contents of the agreements does not show the words franchise, franchiser or franchisee. However, from above breakup we are also confronted with certain words and terms which depict the resembling picture of above agreements with franchise agreements. We have already observed that it is not very unusual that the tax avoidance becomes one of the main objects or purposes of the parties to a contract of commercial nature. In order to avoid tax the parties try to depict the distorted picture of a transaction as to enable them for tax advantages to be obtained. This object is usually achieved by abusage of words and bending the rules and by manipulating the system in order to get desired outcome. We would better analyze the question before us after having some idea about the meaning and scope of words 'Franchise' and 'Franchise agreement'. We explore them as under: Franchise : (General concept)
(1) Franchise: Generally speaking, a franchise business takes effect when a person, either natural or artificial grants an authority or a right to another person, either natural or artificial, to market the former's goods or services within a certain territory or location. Generally, there are two main types of franchises (a)Entire business format franchise - The franchisee receives the use of the trademarks, reputation (good will), trade secrets, copyrights, and marketing and service information of the franchisor.
(b)Product distribution franchise - The franchisor distributes a particular product to franchisees, such as vending machines.
(2) The term franchise also refers to a type of business in which a group or individual receives a license from a corporation to conduct a commercial enterprise. Corporate franchises enable a franchisee to market a well-known product or service in return for an initial fee and a percentage of gross receipts.
(3) A type of license that a party (franchisee) acquires to allow them to have access to a business's (the franchisor) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees.
(4) A franchise agreement is the contract that establishes the relationship, including rights and obligations, of the parties named as franchisor and franchisee. Generally, the franchise agreement provides the following:
(a) The franchise fee (b)Restrictions placed on the business management structure of the franchisee (c)The inventory (d)The income which the franchiser requires and when it will be calculated (e)Length of the agreement (time span)
(t) A termination clause as to upon what event will the franchiser terminate the franchise agreement.
(5)A franchise agreement is not a fixed draft but one can negotiate before entering a franchise contract that best suits one's business goals and priorities.
(6)Franchise (in government)
A right specifically conferred on a group or individual by government, especially the privilege conferred on a corporation such as electricity, telephone, and bus services. Franchise may be revoked with or without the consent of the grantee as stipulated in the contract for the grantee's violation of terms, and the government may take back granted rights by eminent domain proceedings. Franchise provisions usually include tenure; compensation to the grantor; the services, rates, and extensions; labour problems, security and strike regulations; capitalization; and reversion to the grantor.
(7)Franchising is a method of doing business in which someone shares business, idea, art, etc. with other people in exchange for an annual fee and a percentage of the gross profits. The idea dates back to the middle ages when a king would grant rights to individuals to engage in activities such as running a market or brewing ale. The Singer sewing machine company, which granted distribution rights to franchisees in 1851, is often cited as the first modern franchise operation.
(8)Franchise in dictionaries According to various dictionaries the word 'Franchise' is described as a noun and as a verb. As a noun, besides other meanings the following meanings of word Franchise are also described:
(i) A privilege or right officially granted to a person or a group by a government, especially:
(a) The constitutional or statutory right to vote.
(b) The establishment of a corporation's existence.
(c). The granting of certain rights and powers to a corporation.
(d) Legal immunity from servitude, certain burdens, or other restrictions.
(ii)Authorization granted to someone to sell or distribute a company's goods or services in a certain area.
(iii)A business or group of businesses established or operated under such authorization.
(iv)A brand name under which a series of products is released.
(v)The territory or limits within which immunity, a privilege, or a right may be exercised.
(vi)The right or license granted by a company to an individual or group to market its products or services in a specific territory.
(vii)The 'right to own and operate a professional sports team as a member of a league.
(viii) An authorization granted by a government or company to an individual or group enabling them to carry out' specified commercial activities, for example acting as an agent for a company's products.
(ix)An authorization to sell a company's goods or services in a particular place.
(x)A contract granting the right to operate a subsidiary business.
(xi)A business established or operated under an authorization to sell or distribute a company's goods or services in a particular area.
(xii) A commercial or industrial enterprise and the people who constitute it; (As a Verb (Transitive)
To grant a franchise to an individual or group.
Synonyms: Warrant; Charter; License; Permit; Authorization; Permission; Sanction; Concession; Privilege; Prerogative.
(9) Franchise: (As per Ld. AR)
Ld. AR within his written synopsis has placed on record the definition of 'Franchise' explaining the term from various aspects in the following manner:--
(I) Franchising is a much abused word and means many different things to different people. In simple terms it is the granting of the certain rights, title. Brand/Goodwill/title expertise/known now by one party (franchiser) to another (the franchisee) in return for a sum of money. The franchisee then exercises those rights under the guidance of the franchiser. Such a vide definition encompasses many different forms of licensing arrangements and ranges from the right to manufacture denim jeans or soft drinks under a particular brand name to the right to run a local radio station under the auspices of the Independent Broadcasting Authority.
(ii) Commonly known practice is concerned only with business format franchising which can be defined as a contractual license granted by one person (the franchiser) to another (the franchisee) which: (a)Permits or requires the franchisee to carry on a particular business using the franchiser's know-how under the franchiser's brand as an independent business; (b)Allow the franchiser to exercise continuing control over the manner in which the franchisee carries on the franchised business; (c)Obliges the franchiser to provide the franchisee with ongoing support in carrying on the franchised business.
As a commercial matter, the agreement inevitably requires the franchisee periodically during the period of the franchise to pay to the franchisor sums of money in consideration for the franchise and/or goods and/or services provided by the franchiser to the franchisee.
(iii)... The franchiser is renting the franchisee the right to use its business format; hence the name 'business format franchising'. However, the right to use the business format is for a limited period of time. The franchisee gains no interest in the actual ,ownership of the format or associated marks. The rights he enjoys are similar to those of a tenant when leasing a house. During the period of the lease the tenant has full enjoyment of the demise, but the day after the expiry of the lease he has no rights over the property at all. All the rights, titles enjoying by franchisee come to final end once the duration of agreement expired or suspended or terminated. [ref.
HY&Co/2010/198 dated 2-10-2010] (iv)... franchise is purely a commercial transaction which has recently developed (in the last three or four decades) to expand develop and enhance the sales or business of a manufacturers or trader beyond his own capacity or even beyond his own borders internationally in order to bring in more income and more profits from his business or trade........"
The definition of franchise "requires" that there should be a contractual obligation or otherwise between the franchiser and the franchisee to pay a fee or consideration for the use of the patent or right identified by the franchiser........"
In a franchise a royalty transaction the franchiser ordinarily provides his name, logo, technical or production methods, invention or skills etc to the franchisee against a fee or charge but at the termination of agreement he takes back all those facilities and franchisee can use them no more, but the franchiser never gets any or all the investment of the franchisee on the project free of cost........."
27. From perusal of above given description of the word 'franchise' and the breakup of agreements between KPT and TOCs, it becomes blazoning clear that the word Franchise admits of many situations, the commonest being the assignment of some authority or some right by one person to another person to be called as franchiser and franchisee respectively. The agreement in this case, by itself declares that the headings used in the agreement are for convenience sake only and shall be ignored in construing the agreement (Article 1.2). The terms and contents of these agreements negate almost all the contentions of Ld. AR, who is reluctant to accept these agreements as the one resembling to a franchise agreement. Ld. AR has termed these agreements as rent agreements while these agreements name themselves as 'implementation agreements'. With due respect, we do not, agree with this notion of Ld. AR. The Law of Rent is a self contained law wherein the rent of a site is equal to the economic advantage obtained by using the site in its optimal or most productive use. The word 'rent' has its specific legal identity and specifications. Ld. AR has not been able to give any justification for using the word royalty in place of well recognized legal term rent. The attempt of introducing these types of factual disagreements or conflicting proposals for interpretations of a contract would mean to attribute to the parties, an act to commit a commercial nonsense by allowing the execution of a contract worth billions in an oblivious manner. A contract should not be interpreted in a manner that may produce absurd results, because, it is hardly believable that the parties viewed to be rational persons pursuing rational ends, would have agreed to seek such results. Even otherwise in cases of doubt an ambiguity in a contract should be resolved against the drafter of the contract. In our humble view, these agreements can safely be classified as franchise agreements as the same have almost all the features of a franchise agreement. This is even true without needing to make any attempt to disambiguate any of the words or terms of these agreements. The word royalty given as an equivalent of franchise payments (fee or share in the income) is not a totally alien feature to a franchise agreement.
28.Let us now examine the liability of the subject company in the context of definition of franchise given under subsection (12a) of section 2 of Federal Excise Act, 2005. It is reproduced here under: [Subsection (12a) of Section 2 of Federal Excise Act, 2005] (12a) "franchise" means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved; This definition of franchise provided under Federal Excise Act, 2005, is vide and broad enough to incorporate in it, all important features of the word franchise described by us as above. Karachi Port Trust (KPT) includes in its functions, to oversee all the operations of the Port at Karachi Sindh, Pakistan. KPT in its declared Mission Statement on its website has stated as under:-- "In pursuance of the Landlord Port Strategy, to lease out port infrastructure, land, access and assets to private port operators on long, term basis while retaining regulatory functions."
29.Admiralty or maritime activity is a distinct subject, comprising of both domestic law governing maritime activities, and private international law. It deals with matters including marine commerce, marine navigation, shipping, sailors, and the transportation of passengers and goods by sea.
Admiralty also covers some land based commercial activities that are maritime in character.
30. The word Royalty as a noun has different connotations. Besides its other meanings, it also refers to some specific meanings with reference to the financial and commercial undertakings.
These inter alia, include the following:--- (a)It refers to the payment to the holder of a patent or copyright or resource for the right to use their property; (b)A share of the profit or product reserved by the grantor, especially of an oil or mining lease.
Also called override. The word override in Finance means, "the commission paid to executive". This is a commission paid to an Accounts Executive on the basis of sale made by a representative; (c)It refers to a right or prerogative of the crown, as that of receiving a percentage of the proceeds from mines in the royal domain; (d)The payment for the granting of a right by a monarch to a corporation or an individual to exploit specified natural , resources; (e)A share paid to a writer or composer out of the proceeds resulting from the sale or performance of his or her work; (f)A share in the proceeds paid to an inventor or a proprietor for the right to use his or her invention or services.
31. While before drawing any conclusion on this point, we are also guided by the case-law cited and placed on record by Ld. AR. We have been made abreast thereby that 'in taxation matters the courts have always had the authority to examine the true nature of every transaction and payment, without regard to what parties call it, and the liability of tax eventually rests upon what the courts determine to be the true nature of the transaction or payment, and not to its mere form or name.
In this connection Ld. AR has placed reliance on the following authorities:--
(1) "In the case of Wesleyan General Assurance Company the Privy Council in (1948-16-ITR-101) held that Two propositions are well established in the application of law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist a taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is, what is the real character of the payment, not what the parties call it. Secondly, a transaction which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. (2) In the case of Gosalia Shipping (Pvt.) Ltd. The Supreme Court of India in (1978-AIR-1196) held that It is true that one cannot place over-reliance on the terms which the parties give to their agreements or on the label which they attach to the payment due from one to the other. One must have regard to the substance of the matter, and if necessary, tear the veil in order to see whether the true character of a payment is something other than what by a dear device of drafting, it is made to appear.
(3) Similarly in the case of Gammon (Pak) Ltd. the Sindh High Court Karachi in (1966) 14 Tax 304) by relying on the decision of Supreme Court of India in the case of Kika Bhai Premchand reported at (1953) 24 ITR 506) held that It is a 'well settled principle that in revenue cases regard must be had to the substance of the transaction rather than to its mere form.
32. Having traversed through all the above pages of this order, w feel ourselves a bit able to have given answers to the questions raised herein above. It is evident that respondent/subject company has given/ assigned the rights to TOCs to engage in the business activity of providing services related to port facilities on the assigned berths of terminal and in lieu thereof the respondent/subject company has been receiving a fee from the licensees/authorized TOCs which has been referred to as 'royalty' in the business agreements between KPT and TOCs, therefore, in all the fours of law and facts, the subject company (KPT) is liable to pay FED on amounts received by it from TOCs as royalty besides any fee in addition thereof.
33.The issue raised in ground No,2 of the appeal is thus replied in affirmative and the appeal of the appellant also succeeds to the extent of ground No,2. As a result thereof, we in relation to above framed 1st and 2nd point of determination, hold as under:--- (A)The impugned order dated 26-5-2011, passed by Learned CIR (Appeals-II), Karachi in Appeal No, 87 of 2011, is bad in law and facts, therefore, not sustainable. The same is hereby annulled for not being just and proper in facts and law. Accordingly, our finding to the 1st point for determination is in negative.
(B)The referred agreements executed by KPT with TOCs contain almost all the main features of franchise and the same can be safely classified as franchise agreements. The agreements between KPT with TOCs are fully covered within and under the definition of franchise contained in section 2(12a) of Federal Excise Act, 2005 and 'the amounts received by KPT as royalty for the services/facilities/rights provided and performed at or concerned with the Port are thus chargeable as mentioned in Table II of First Schedule to the Federal Excise Act, 2005. Accordingly, our finding for the 2nd point for determination is in affirmative.
34. We now take up the ground No,4 of this appeal which contains the prayer as under:-- "It is therefore, prayed that the order of learned CIR (A) may be vacated and that of Officer Inland Revenue Unit-12 may be restored."
The prayer of the" appellant is dividable in two parts. Its first part relating to the impugned order of Ld. CIR(A) stands allowed by our findings recorded vide (A) above, on the 1st point for determination, wherein the impugned order has been annulled for not being just and proper in facts and law. The second part of this ground concerns with the order-in-original passed by Ld.
OIR/DCIR. As we have already observed that in view of the line of arguments followed by the parties in this case, we are also laden with another. responsibility, requiring us thereby to weigh the legal objections raised by Ld. AR against the order-in-original passed by Ld. OIR/DCIR. Although, we, may not be legally bound in stricto sensu, to address 'these contentions but owing to their legal and juridical posture, we feel ourselves under obligation to find the answers to such contentions as well, in order to do complete justice and also for a matter of propriety' . The answer to this second part of ground No,4 will in turn reply our 3rd point for determination i,e, 'whether the order-in-original passed by Ld. OIR/DCIR as a whole is proper and enforceable according to law?' In order to get an appropriate and just answer to this point, we would like to examine it in juxtaposition with the legal objections raised by Ld. AR. Ld. AR amongst others, has also raised the following legal objections:
(i) The OIR/DCIR had no jurisdiction to pass the order-in-original as the subject company being not a registered person under FE Act, 2005, its case was pertaining to a non-filer and as such not within the domain of any audit function; (ii)The order-in-original has been passed by Ld. OIR/DCIR without affording opportunity of hearing to the subject company; (iii)Notice under section 46 of FE ACT, 2005, required to be issued, has not been issued in this case; (iv)The action of Ld. OIR/DCIR is time-barred; (v)The order passed by Ld. OIR/DCIR is in violation of mandatory provisions of law and as such not enforceable being illegal and nullity in the eyes of law.
35. Looking to these objections, we are of the opinion that as far as the first objection is concerned, there is an special and particular definition of registered person in view of the subsection (20) of section 2 of Federal Excise Act, 2005, which reads as under:--
(20) "registered person" means a person who is registered or is required to be registered under this Act provided that a person who is not registered but is required to be registered shall not be entitled to any benefit or privilege under this Act or rules made there under, unless he is registered and such 'benefit and privilege, unless allowed by Board, shall be confined to period of registration; Therefore, from this definition of registered person also includes' the person required to be registered or registerable person as well. Accordingly, we reject the contentions. of Ld. AR regarding the question of jurisdiction and hold that the issue involved in this matter pertains to the question of determination of duty and thus the jurisdiction falls within the domain of Audit division and same has been validly exercised by Audit Div-1, RTO-III, Karachi.
The second objection of Ld. AR is also not tenable in view of the evidence born the record. The subject company through Ld. AR has availed appropriate opportunity of hearing and all its material objections have been substantially dealt with and replied by Ld. OIR/DCIR. Accordingly, we reject the contentions of Ld. AR regarding the question of affording opportunity of hearing to the subject company.
The third objection of. Ld. AR regarding non-issuance of the notice under section 46 of FE Act, 2005 is also uncalled for. Provisions of section 46 of FE Act, 2005, pertain to, the cases of routine departmental annual audit for verification of record of the cases of registered persons whose returns have been filed and not unregistered or registerable persons, who have not filed any return under FE Act, 2005. The subject company in the present case has been proceeded to under the provisions of section 14 of FE Act, 2005, which the proper and appropriate provision in the circumstances of this case. The contents of the two sections are reproduced below for ready reference:-- SECTION 14 (As it stood prior to Finance Act, 2010)
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 three 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.
(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 business 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.
SECTION 46 (As it stood prior to Finance Act, 2010)
46. Departmental Audit.---(1) The Officer of Inland Revenue authorized by the Board by designation may, once in a year, after giving advance notice in writing, conduct audit of the records and documents of any person registered under this Act.
(2) In case the Commissioner has information or sufficient evidence showing that such registered person is involved in fraud or evasion of duty, he may authorize a Officer of Inland Revenue, not below the rank of Assistant Commissioner to conduct audit at any time in a year "(2A) After completion of the audit under this section or any other provision of law, the Officer of Inland Revenue may, if consider necessary, after obtaining the registered person's explanation on all the issues raised in the audit shall pass an order under section 14, imposing the correct amount of duty, charging default surcharge imposing penalty and recovery of any amount erroneously refunded"
(3)Notwithstanding the penalties prescribed in section 19, if a registered person wishes to deposit the amount of duty not paid, short paid or the amount of duty evaded along with default surcharge voluntarily, whenever it comes to his notice, before commencement of audit, no penalty shall be recovered from him: Provided that if a registered person wishes to deposit the amount of duty not paid, short paid or amount of duty evaded along with default surcharge during or after the audit but before the conclusion of original adjudication proceedings, he may deposit such amount along with twenty five percent of the amount of penalty prescribed under this Act or the rules made thereunder and in such case, further proceedings in the case shall abate.
(4)The Board may appoint a Chartered Accountant or a Cost and Management Accountant or a firm of such accountants to conduct audit of a person liable to pay duties under this Act in such manner and subject to such conditions it may specify (5)The audit of the registered person shall generally be a composite audit covering all duties and taxes to which his business or activity is liable under the laws administered by the Board.
Perusal of above provisions of law shows that the two provisions imply to different situations. Ld. AR at one hand has claimed the relief under concept of limitation on the basis of time period provided under section 14(1) ibid and at the same time has also claimed the right of having notice issued to him under section 46 ibid. Ld. AR claims on the one hand to be treated as un-registered person (non-filer) and on the other hand also claims to be treated as a registered person. These conflicting pleas of Ld. AR are not permissible under law. Accordingly, we hold the provisions of section 46 ibid inapplicable to the present case and thus reject the contentions of Ld. AR regarding the question of issuance of notice under section 46 ibid. Ld. AR has raised the legal objection that the action initiated by Ld. OIR/DCIR is time barred. It is admittedly evident that show-cause notice under Section 14(1) of Federal Excise Act, 2005, was issued on ,21-5-2010 and the alleged period of default/non levy was from May, 2007. Section 14(1) of FE Act, 2005, lays down time limit of three years, hence, the notice under section 14(1) of FE Act, 2005, is held to be within time. Therefore, we also reject the contention of Ld. AR regarding the question of limitation as being untenable.
As far as the last legal contention of Ld. AR regarding the violation of mandatory provisions of law by Ld. OIR/DCIR, is concerned, we have not been able to notice any such violation attributable to Ld.
OIR/DCIR in the course of passing the order-in-original. Accordingly, this objection of Ld. AR is also rejected as being immaterial.
36. The net result of our entire discuss and reasoning above is that the 3rd point for determination is answered in affirmative and the present appeal is allowed as prayed by the appellant in the ground No,4 of the appeal.
Before parting with this order, we deem it pertinent to mention here that all the above given information or description of various terms and words, attributable to us, is solely collected by us only for our own learning and understanding of these terms and words. All this information is obtained through various sources in a drifting manner. We do not claim the description to be ultimate and exhaustive. Therefore, no one is precluded from proving or disproving the truth and correctness of all or any of the above information.
The order accordingly.