MUHAMMAD SAJID MEHMOOD SETH I, J. Through instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 ("the Ordinance of 2001") , following questions of law, asserted to have arisen out of impugned order dated 03.12.2009, passed by learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore ("Appellate T ribunal") , have been pressed and argued for our opinion:-
1. Whether the learned Appellate Tribunal was justified to hold that the amount of Rs.7,893,898/- which was disallowed by the department under Section 21(c) of the Income Tax Ordinance, 2001 did not attract withholding tax under Section 153 by labeling it as Royalty instead of advertising services?
2. Whether the learned Appellate Tribun al was justified to hold that Rule-13 of Income Tax Rules, 2002 is not mandatory for purpose of apportionment of expenses under Section 67 of the Income Tax Ordinance, 2001?
2. Brief facts of the case are that income tax return for the year 2003, filed by respondent-taxpayer , declaring loss at Rs.4,368,500/, was taken to be deemed assessment under Section 120 of the Ordinance of 2001. However , subsequently , proceedings under Section 122(5A) of the Ordinance of 2001 were initiated, which culminated in passing of amended assessment order determining income at Rs.235,442,602/-. Feeling aggrieved, respondent- taxpayer filed appeal before CIT (Appeals), which was disposed of vide order dated 20.02.2009. Feeling dissatisfied, respondent-taxpayer approached learned Appellate Tribunal by filing second appeal, which was accepted vide impugned order dated 03.12.2009. Hence, instant reference application.
3. Learned Legal Advisor for applicant-d epartment submits that the nature of the expenditure was nothing but advertisement / sale promotion expenses and respondent-taxpayer was paying this amount in lieu of advertisement services offered by the McDonald, which attracts the provisions of Section 153(1)(b). He further submits that Section 67 of the Ordinance of 2001 authorizes the FBR to make rules for adop ting such reasonable basis and Rule 13 of the Income Tax Rules, 2002, clearly mentions the importance of prora tion according to gross receipts mentioned therein. He has relied upon Commissioner Inland Revenue v. Messrs Quality Textile Mills Ltd.
(2013 PTD 2095 ).
4. Learned counsel for the respondent-ta xpayer defends the impugned order and submits that deduction claim on account of "rebate" paid to M/s McDonalds was liable to be allowed and it was not subject to withholding tax under Section 153(1)(b) of the Ordinance of 2001. He further submits that "reasonable basis" as mentioned in Section 67 of the Ordinance of 2001 is a specific criteria and proration as mentioned in Circular No.13 is a general criteria, hence, specific criteria would prevail over the general criteria. He has relied upon Suo Motu Case No.13 of 2009 (PLD 2011 Supreme Court 619), Chairman, Federal Board of Revenue, Islamabad v. Messrs Al-Technique Corporation of Pakistan Ltd. and others (PLD 2017 Supreme Court 99), Young' s (Private) Limited and others v. Province of Sindh and others (2019 PTD 389) and Sami Pharmaceutical (Pvt.) Ltd. and others v.
Province of Sindh through Chief Secretary and others ( 2021 PTD 731 ).
5. We have heard learned counsel for the parties at length and gone through the record with their able assistance.
6. Perusal of record shows that respondent-taxpayer extended rebate of Rs.7,893,898/- to M/s McDonalds for exclusive sale of the brands of the Coca Cola company at the McDonalds' outlets. The first question before us is whether aforesaid amount was liable to tax deduction under Section 153(1)(b) or such deduction was allowed in computing the income of a person under the head "Income from Business" under Section 21(c) of the Ordinance of 2001. Before dilating upon this issue, it would be beneficial to reproduce provisions of Section 153(1)(b) of the Ordinance of 2001, as existed at the relevant time, which reads as under:- "153. Payments for goods and service s.- (1) Every prescribed person making a payment in full or part including a payment by way of advance to a resident person or permanent establishment in Pakistan of a non-resident person -
(a) ----
(b) for the rendering of or providing of services;
(c) --- shall, at the time of making the payment, deduct tax from the gross amount payable at the rate specified in Division III of Part III of the First Schedule.
Admittedly , respondent is engaged in manufacture and sale of soft drink with the brand name "Coca Cola". The amount in question was paid in consideration for acquiring rights for exclusive sale of the brands of the Coca Cola Company at the McDonalds' outlets. For invocation of provisions of Section 153(1)(b) of the Ordinance of 2001, it is necessary to comprehend the scope of expression 'services' used therein. In our view, every payment cannot be presumed to come within the scope of aforesaid term 'services' because such latitude would defeat and overlap other services within the contemplation of the Ordinance of 2001. The consideration of acquisition of exclusive rights, by its nature, does not come within the expression of 'services' as used in Section 153(1)(b) rather comes within the ambit of "royalty" defined in Section 2(54) of the Ordinance of 2001. There is no ambiguity that the rebate is a reduction against sale consideration and hence, could not be equated with consideration for services simply for the reason that buyers of goods do not render any service to the seller .
7. There is another pivotal aspect of the matter that as per provisions of Section 153, a registered person is only required to deduct tax at the time of making payment to a resident person etc., however , when the payment is not being actually , physically or practically made, possibility of deduction of tax does not arise at all as in the instant case, there was only rebate and not an actual payment, thus, respondent was entitled to deduct the amount in question as an expense under Section 21(c). Therefore, it was absolutely impracticable and impossible to deduct a certain amount from an amount which was not being paid. Thus, we are persuaded to hold that the interpretation of provision of Section 153(1)(b) can be extended to require something to be done which is not possible. This view is also supported by dictum of law laid down by Hon'ble Apex Court in case reported as Messrs Pakistan Television Corporation Limited v. Commissioner Inland Revenue (Legal), LTU, Islamabad and others (2017 SCMR 1136).
8. Now, we advert to the second questio n regarding apportionment of expenditures incurred for deriving income from various sources. The respondent apportioned common expenses between own manufactured goods and imported goods on the basis of gross profits', however , stance of the department is that apportionment should have been done on the basis of 'turnover'. Section 67 of the Ordinance provides mechanism for apportionment of expenditures, with respect of class or classes of income, as classified therein, which is reproduced hereunder for ease of reference:-
67. Apportionment of deductions.- (1) Subject to this Ordinance, where an expenditure, relates to -
(a) the derivation of more than one head of income; or [(ab) derivation of income comprising of taxable income and any class of income to which sub-Sections (4) and (5) of Section 4 apply , or;]
(b) the derivation of income chargeable to tax under a head of income and to some other purpose, the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates.
(2) The Board may make rules under Section 237 for the purposes of apportioning deductions."
Section 67(2) of the Ordinance of 2001 authorizes the FBR to make rules for adopting such reasonable basis and Rule 13(3) of the Rules of 2002, devises a formula for apportionment of common expenditures according to gross receipts. For ready reference, aforesaid Rule is reproduced hereunder:-
13. Apportionment of expenditures.- (1) This rule applies for the purposes of Section 67, which provides for apportionment of expenditure incurred for more than one purposes.
(2) Any expenditure that is incurred for a particular class or classes of income shall be allocated to that class or classes, as the case may be.
(3) (a) Any common expenditure excluding financial expenses relatable or attributable to non-business advances or loans and the amount referred to in sub-rule(2) relatable to business including presumptive and exempt income, shall be allocated to each class of income according to the following formula, namely:- AxB/C where- A is the amount of the expenditure incurred; B is the total amount of gross receipts (without deduction of expenditures) for the tax year for the class of income; and C is the total amount of gross receipts (without deduction of expenses and net gains for the tax year of all classes of income;
(b) Where, however , net gain, brokerage, commission and other income is to be taken into account on turnover of such transactions, such income shall be compared with gross profit from business for adopting figures for components "B" and "C" of the formula at (a) above.
(4) Where expenditures are to be allocated among different classes of income under sub-rule (3) consideration shall be given to the nature and source of each class of income, on reasonable basis to earn each class of income (particularly , in allocating selling expenses).
(5) ---
(6) --- We have minutely gone through the orders of taxing authorities and are of the considered opinion that common expenses of respondent-taxpayer were rightly prorated on the basis of gross receipts as per Rule 13(3) and observation of learned Appellate Tribunal that aforesaid Rule was not manda tory is not legally sustainable.
Reference is placed upon Messrs Quality Textile Mills Ltd. supra and Commissioner Inland Revenue, Lahore and Messrs Monnoowal T extile Mills Ltd., Lahore ( 2022 PTD 305 ).
9. So far as the argument of learned counsel for respondent taxpayer that Rule 13 is beyond the mandate of Section 67 is concerned, suffice it to say that undoubtedly , Rules are subordinate and delegated legislation, deriving authority and legal cover from the provisions of the main statute and cannot override the provisions of the Statute. They are meant to deal with details and can neither be a substitute for the fundamentals of the parent statue nor can add to them. Delegated legislation forms an important part of the statutory law, which expounds and explains the skeleton principles of the parent statute in order to achieve the purposes of the said legislation. To determine the vires of delegated legislat ion, this Court has to examine whether such delegated legislation was beyond the power granted by the enabling legislation and whether such delegated legislation was consistent with the parent statute. Needless to say that Rules / regulations continue to be rules subordinate to the parent statute, and though for certain purposes, including the purpose of construction, they are to be treated as if contained in the statute, their true nature as subordinate legislation is not lost. Rule of interpretation is that delegated legislation can only be struck down if it was directly repugnant to general purpose of the statute which authorized it or was repugnant to well established principle of statute. We are of the opinion that Rule 13 has been framed by deriving authority from Section 67 and the Rule is advancing the purpose of aforesaid provision of the parent statute and there appears no inconsistency between them. Therefore, this argument, being devoid of any force, is repelled.
Reference can be made to Khawaja Ahmad Hassan v. Government of Punjab and others (PLD 2004 Supreme Court 694), Suo Motu Case No.13 of 2009 (PLD 2011 Supreme Court 619), Suo Motu Case No.1 1 of 2011 (PLD 2014 Supreme Court 389), Muhammad Amin Muhammad Bashir Limited v. Government of Pakistan through Secretary Ministry of Finance, Central Secretariat, Islamabad and others (2015 SCMR 630), Independent Newspapers Corporation (Pvt) Ltd and others v. Federation of Pakistan and others (PLD 2017 Lahore 289 ) and Rida Fatima v . Pakistan Medical Commission and others (PLD 2022 Lahore 197).
10. Even otherwise, a reference under section 133 of the Ordinance of 2001, lies before this Court on a question of law only and the Court is obliged to answer the same in accordance with a rule of law. A question of law means a question as to what the law is on a particular point, which provision of law is applicable to a particular factual situation and what the true rule of law is on a certain matter . In reference jurisdiction, this Court cannot either strike down a provision of law or declare it ultra vires of the Constitution. Any person desirous of a declaration of the kind can very well approach this Court in Constitutional jurisdiction. While exercising reference jurisdiction, this Court confines itself to the questions framed / proposed and gives an opinion in the perspective of the facts as found by the Tribunal and to enter upon the const itutionality of a particular provision is not at all required in such matters.
Reference can be made to Messrs Pakistan Television Corporation Limited v. Commissioner Inland Revenue (Legal), LTU, Islamabad and others (2017 SCMR 1136), Muhammad Siddique v. The Commissioner of Income-T ax, Zone-A, Lahore (2001 PTD 1998 ) and Commissioner Inland Revenue, Legal Division, Regional Tax Of fice, Islamabad v . Messrs Pak Steel Re-Rolling Mills ( 2020 PTD 1252 ).
11. In view of the above, our answer to the Question No.1 is in affirmative i.e. against the applicant-department and in favour of respondent-taxpayer whereas Question No.2 is answered in negative i.e. against respondent- taxpayer and in favour of applicant-department.
This Reference Application is disposed of accordingly .
12. Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 133 (5) of the Income Tax Ordinance, 2001.