Beverages Sector and Imposition of Federal Excise Duty on Franchise Fee

Beverages Sector and Imposition of Federal Excise Duty on Franchise Fee Case Laws Commercial Constitutional Law Federal Excise Duty Franchise Government Duties Knowledge - Constitutional Law Lahore High Court Litigation & Arbitration Solutions - Constitutional Law Tax Mr. Justice Muhammad Sajid Mehmood Sethi in his judgment has decided the issue regarding beverages sector and imposition of Federal Excise Duty on franchise fee in Writ Petition No. 16047 of 2010.

1. Brief facts, as narrated in this writ petition, are that the petitioner is a private limited company, engaged in the business of manufacturing and marketing of beverages, namely, Pepsi, Teem, Mirinda, 7 Up and Mountain Dew, under an exclusive bottling agreement from M/s Pepsico, Inc. U.S.A. (“Pepsico”). In the year 2006, through Finance Act, 2006, Item No.11 was added to the First Schedule of the Federal Excise Act, 2005 (“Act”), whereby Federal Excise Duty (“FED”) at the rate of 5% of the charges is levied on the franchise services. On 05.06.2006, through S.R.O.561(I)/2006, Rule 43A was added to the Federal Excise Rules, 2005 (“Rules”), providing the detailed mechanism and procedure regarding payment of the FED on franchise fee.

In this regard, Central Board of Revenue, as it then was, also issued a Federal Excise General Order (“FEGO”) No. 5/2006 after FEGO No. 4/2005 and FEGO No. 5/2005, however, petitioner and other beverage manufacturers did not pay the FED on franchise fee for the year 2007-08. Petitioner received a Show Cause Notice (“SCN”) dated 06.05.2010, containing certain allegations. Through instant writ petition, the aforesaid Item No.11 of the First Schedule of Federal Excise Act, 2005, Rule 43A of the Federal Excise Rules, 2005, FEGO No. 5/2006, and SCN dated 06.05.2010, have been challenged, with the following prayer:

“In view of the above, it is, therefore, most respectfully prayed that Item No.11 of the First Schedule of the Federal Excise Act, 2005, Rule 43-A of the Federal Excise Rules, 2005, the amendments made through the Finance Act, 2008, FEGO No.5 / 2006 and Show Cause Notice dated 06.05.2010 may kindly be declared to be illegal, without lawful authority and of no legal effect.

Any other relief that this honourable Court deems fit and appropriate, in the facts and circumstances of the case, may also kindly be granted.”

2. Learned counsel for petitioner submits that the respondents have filed Exclusive Bottling Agreement along with parawise comments in one of the connected writ petitions, perusal of which shows that there is no element of any franchise, fee, royalty etc., and there is no relationship of franchiser and franchisee between the petitioner and Pepsico. While relying on the judgment dated 09.06.2014, passed by the learned Division Bench of Hon’ble Peshawar High Court in the case of M/s Northern Bottling Company (Pvt.) Ltd. (Sales Tax Reference No. 5/2003), learned counsel for the petitioner submits that in the said reference one of the respondents had a bottling agreement, like the petitioner, with Pepsico, and the Hon’ble Peshawar High Court was pleased to hold that there is no identifiable link between them for any services rendered by Pepsico against a fee or consideration. Learned counsel further submits that the department went in appeal before the august Supreme Court of Pakistan against the said judgment of Hon’ble Peshawar High Court by filing Civil Petition Nos. 1742 & 1743 of 2014, and the Supreme Court of Pakistan dismissed the leave applications by holding that the mere fact that respondent in the said Civil Petitions buys concentrate from Pepsi Cola International (Pvt.) Limited, Hattar (“PCI”) and then bottle the same under a formula provided by Pepsico does not attract the charging provision of the Act, 2005. He further contends that item No. 11 of the Table-II of the First Schedule was added through Finance Act, 2006, whereby FED at the rate of 5% was levied on the charges of franchise services.

In the present case, as there is no franchise fee or charges, hence, no Federal Excise can be demanded on the same, and the FEGO No. 5 / 2006 has illegally levied excise duty on a criteria that is not provided in the law. Adds that FEGO No.5 / 2006 is even violative of Rule 43A of the Federal Excise Rules, 2005, and the same being in conflict with the Rules, is liable to be ignored. Learned counsel for petitioner has relied upon Nagina Silk Mill, Lyallpur v. The Income-Tax Officer, A-Ward Lyallpur and another (PLD 1963 Supreme Court 322), Edulji Dinshaw Limited v. Income-Tax Officer (PLD 1990 Supreme Court 399), Messrs Ulian Hoshang Dinshaw Trust and others v. Income-Tax Officer, Circle XVIII South Zone, Karachi and others (1992 SCMR 250), Al Ahram Builders (Pvt.) Ltd. v. Income Tax Appellate Tribunal (1993 SCMR 29), Messrs Chenab Cement Product (Pvt.) Ltd. and others v, Banking Tribunal, Lahore and others (PLD 1996 Lahore 672), United Business Lines, S.I.E. Gujranwala and another v. Government of Punjab through Secretary, Local Government, Lahore and 5 others (PLD 1997 Lahore 456), Attock Cement Pakistan Ltd. v. Collector of Customs, Collectorate of Customs and Central Excise, Quetta and 4 others (1999 PTD 1892), Messrs Shamim & Co. v. Tehsil Municipal Administration, Multan City through Nazim and 2 others (2004 YLR 366), Commissioner of Income Tax v. Messrs Eli Lilly Pakistan (Pvt.) Ltd. (2009 PTD 1392), and Iqbal Hussain through authorized attorney v. Federation of Pakistan through The Secretary, Revenue Division and 2 others (2010 PTD 2338).

3. On the other hand, learned counsel for respondents contend that the procedure for collection of duty on such services has been laid down vide Rule 43A of the Federal Excise Rules, 2005, with certain clarifications with special reference to local beverage companies vide FEGO No. 5/2006 dated 05.08.2006. They further contend that the FED is recoverable from the Franchisee i.e. the local beverage company, who claims to have no franchise agreement, because Rule 43A and FEGO No. 5 / 2006 is covered in the manner as provided in section 3 of the Federal Excise Act, 2005, therefore, the taxpayer is clearly liable to pay the duty. Learned counsel for respondents further submit that the Directorate of Intelligence & Investigation is a necessary party and instant writ petition is not maintainable without impleading the said Directorate as party to the petition. They have placed reliance upon Abbas Corporation v. Appellate Tribunal and another (2005 PTD 803). They further submit that factual controversy is involved and alternate remedy is available to the petitioner, therefore, writ petition is not maintainable. In this regard, they have placed reliance upon Deputy Commissioner of Income Tax / Wealth Tax, Faisalabad and others v. Messrs Punjab Beverage Company (Pvt.) Ltd. (2007 PTD 1347) and Mughal-e-Azam Banquet Complex through Managing Partner v. Federation of Pakistan through Secretary and 4 others (2011 PTD 2260).

Regarding the judgment delivered by the Hon’ble Supreme Court in Civil Petition Nos. 1742 & 1743 of 2014, they submit that the august Court was not properly assisted and the main legal questions have not been raised deliberately, thus, the same does not constitute a binding precedent. In this regard, they have placed reliance upon Lone Cold Storage, Lahore v. Revenue Officers, Lahore Electric Power Co. and others (2010 PTD 2502). Learned counsel contend that perusal of business agreement between M/s Pepsico, Inc. U.S.A. and the petitioner determines the relationship of franchiser and franchisee on the basis of definition as provided in section 2(12a) of Federal Excise Act, 2005 read with sub rule (1) of rule 43A of the Federal Excise Rules, 2005.

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