Messrs CYNAMID (PAKISTAN) LTD., KARACHI VS COMMISSIONER OF INCOME TAX, COMPANIES-II, KARACHI, 2007 PTD-KARACHI-HIGH-COURT-SINDH 1946 (2007)

Income Tax Ordinance (XXXI of 1979)---

----S. 79---Addition---Assessee company was carrying on the business of manufacture and sale of pharmaceutical drugs---Import of raw material by assessee from its associated companies on higher rates as compared to the other sources---Assessing officer therefore, directed the assessee to show cause as to why the purchases made by them may not be estimated and difference be added under S.79 of the Income Tax Ordinance, 1979-Validity---Held, case of assessee fell without the ambit of S.79, Income Tax Ordinance, 1979 and no interference of High Court was called for---Principles.

Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. 1992 PTD 954; Messrs Industrial Management v. The Commissioner of Income Tax 1978 PTD 208; Lal Muhammad Abdul Sattar acid Co. v. Commissioner of Income Tax 1995 PTD 752; Mehran Girls College v. Commissioner of Income Tax 2001 PTD 987 and Commissioner of Income Tax, Companies-II, Karachi v. Marck Sharp and Dhome of Pakistan Ltd. C.P.L.A. No.159/K of 1989 distinguished.

I.T.R.A. No.76 of 2002; I.T.O. v. Beecham Pakistan Ltd. 1988 PTD (Trib.) 447; Smith Kline and French of Pakistan Ltd. v. IAC Range-I, Companies-II, Karachi LT.A. No. 2202/KB of 1987-88; Messrs Bayer Pharma (Pvt.) Ltd. v. I.T.O.. I.T.A. No. 17961KB of 1993-94; Sindh High Court CIT v. Glaxo Laboratories Ltd. 1991 PTD 393; and Galaxo Laboratories Ltd. v. CIT Karachi, Civil Appeal No. 237-K of 1991 ref.

Iqbal Salman Pasha for Applicant:

Aqeel Ahmed Abbasi for Respondent.

ORDER

MUHAMMAD ATHAR SAEED, J.---This Income Tax Reference Application has been filed against the order of the Income Tax Appellate Tribunal, dated 29-11-1995 passed in R.A. No. 9/KB of 1995-96 by which the Tribunal had refused to refer eight questions proposed by the applicant for the opinion of this Court. The applicant by this reference application seeks the opinion of this Court on the following proposed questions:--

(i) Whether the learned Appellate Tribunal misdirected himself in law by repelling the contention of the applicants that on the facts and in the circumstances of the case provisions of section 79 of the Income Tax Ordinance, 1979 could not be invoked.

(ii) Whether in view of the fact that the parent company(s) registered Trade Mark MAYABUTOL held more than 95% of the share in the Market the learned Appellate Tribunal misdirected itself in law by holding that registration of Trade Mark does not militate against the freedom of purchase of raw material ...

(iii) Whether in view of the contents of the assessment order whereby addition of Rs.7,747,232 originally proposed by the Assessing Officer was reduced to an addition of Rs.6,027,347 on account of sale price of Rs.81 per Packet of ..Mayambutol.. produced by the utilization of the raw material namely ....Ethenbutol... in manufacturing of goods by the applicants as compared to EPLA.s selling price of Rs.63 for the same quantity of its manufactured drug the learned Appellate Tribunal was right in observing that ...fixing of selling prices by the Ministry of Health on higher side is immaterial for the purpose of section 79 of the Income Tax Ordinance, 1979

(iv) Whether the learned Appellate Tribunal misdirected itself in law by ignoring the contents of the CHART tiled before it wherefrom it was manifest that the applicants had earned excess profit of Rs.2,616,268 by importing Ethembutol...from its Associated undertakings notwithstanding the higher cost-price.

(v) Whether the learned Appellate Tribunal further misdirected itself in law by ignoring the Appellate Order ITA No. 157/KB of 85-86, dated 16-8-1989 whereby addition made under section 79 was deleted by the learned Division Bench on the ground that in view of higher Sale Price of ....indomathacian... as fixed by Ministry of Health, purchase of raw material from the parent company had yielded higher profit to the assessee-company notwithstanding the higher Cost Price.

(vi) Whether in view of the fact that the sale receipts of ..Myymbutol... werehigher by Rs.10,363,500 as compared to EPLA.s sale receipts of its product manufactured out of the raw material of the same nomenclature vis-a-vis higher Cost Price of the same material to the extent of Rs.7,747,232 paid by the applicants company as against EPLA.s Cost price, of the raw material of the same nomenclature, it could be held that the busyness between the applicants and its non-resident associated companies had produced to the applicant less than ordinary profits which might be expected to arise in that business.

(vii) Whether the learned Appellate Tribunal committed a mistake apparent from the records by restoring addition of Rs.6,027,347 as made by the Assessing Officer instead of deleting the same by correcting the error (committed by the. Assessing Officer) of applying ....percentage Excess of 22.2% to Rs.7,747,232 representing difference in cost price of the raw material instead of applying the ....percentage Excess of 22.2% to sales of ...Mayambutol.... Aggregating to Rs.46,635,750.

(viii) Whether in view of the fact that the applicant was not supplied with photostat copies of invoices or any other documents or information the learned Appellate Tribunal misdirected itself in law by vacating .the order of the learned Commissioner of Income Tax (Appeals) whereby addition of Rs.6,027,347 made by the Assessing Officer under section 79 was deleted.

2. Brief facts of the case are that the applicant a company carrying on the business of manufacture and sale of pharmaceutical drugs had filed its return of income for the assessment year 1994-95 declaring an income of Rs.21,80,537. While processing the return for finalizing the assessment, the Income Tax Officer noted that the applicant had imported Chemical Ethanbutol HCL at US$ 60 to 65 per kg. from its associated companies Messrs Cynamid Brasil/Cynamid Italy. A notice under section 62 was issued informing the applicant that the comparative rate of Chemical Ethanbutol HCL imported from other sources was US$ 39.60 per kg which was imported from other supplier namely Chemic Meindarc and directed the applicant to show cause why the purchase made by them may not be estimated at US$ 39.60 per kg and difference be added under section 79 of the. Income Tax Ordinance, 1979. In its reply the applicant took the plea that section 79 cannot be applied as purchases by themselves cannot produce profit, However, nowhere in their reply the applicant disputed that Ethembutol was not available at US$ 39.60 per kg. and requested the Income Tax Officer to confront him with details of such imports. The applicant's explanation was not accepted by the Income Tax Officer, however, the difference in sale price of the tablet Mayambutol against the selling price of EPLA, who had imported the raw material at US$ 39.60 per kg., was considered by the Income Tax Officer and he restricted the proposed addition- of Rs.77,27,233 to Rs.60,27,347.

3. Being aggrieved by the order of the Income Tax Officer, the applicant filed an Appeal before the CIT(Appeals), who vide her order, dated 15-7-1986 in Appeal No. CIT(A)/Z-II 527/85 deleted the addition under section 79 due to the fact that similar additions made in earlier year were deleted by her. Being aggrieved by the order of the CIT(Appeals) the Department/respondent riled an appeal before the Income Tax Appellate Tribunal, who vide their order, dated 26-10-1994 in I.T.A. No. 1511/KB of 1986-87 vacated the order of the CIT(Appeals) and restored the addition as made by the Income Tax Officer.

4. Being aggrieved by the above order of the Income Tax Appellate Tribunal, the applicant filed reference application under section 136(1) before the Income Tax Appellate. Tribunal for referring eight questions for the opinion of this Court, but the Tribunal vide impugned order refused to refer the same to this Court as according to the Tribunal the

proposed questions were either irrelevant or did not arise out of the order of the Tribunal. Hence this reference application.

5. We have heard Mr. Iqbal Salman Pasha learned counsel for the applicant and Mr. Aqeel Ahmed Abbasi learned counsel for the respondent.

6. Initially, Mr. Iqbal Salman Pasha learned counsel for the applicant argued that the main question, which he intended to argue was question No.8. However, when we asked the learned counsel to show us the 1'indiags of the Tribunal on this point, the learned counsel preferred to first read out the contents of the assessment order and on the basis of assessment order he vehemently argued that the Income Tax Officer and Appellate Tribunal had not followed the principle of natural justice as the applicant was not supplied details of the case in which import of the raw-material of Ethembutol was made at US $ 39.60 per k.g. and without fulfilling this mandatory requirement, the Income Tax Officer was not justified in making addition under section 79 and the Tribunal misdirected itself in law in upholding the addition made by the Income Tax Officer. When asked to show from the order of the Income Tax Officer whether the applicant had disputed the cost price relied on by the Income TaxOfficer and whether he had requested the Income Tax Officer to provide him the details of the ,transaction, the learned counsel referred to his reply reproduced in the assessment order. However from a perusal of this reply it becomes prima facie clear that in fact the .applicant has candidly accepted the lower cost price relied on by the Income Tax Officer and had only argued that section 79 cannot apply in case of overstated purchases because purchase do not produce profit. In support of his contention that where the judgment is based on misreading of facts and misconstruing the evidence it is a mixed question of fact and law, the learned counsel relied on following case-laws:--

(1) Commissioner of Income Tax v. Pakistan Industrial Engineering Agencies Ltd. (1992 PTD 954).

(2) Messrs Industrial Management v. The Commissioner of Income Tax (1978 PTD 208).

(3) Lal Muhammad Abdul Sattar and Co. v. Commissioner of Income Tax (1995 PTD 752).

(4) Mehran Girls College v. Commissioner of Income Tax (2001 PTD 987).

7. He also referred to another unreported judgment of the Hon'ble Supreme Court of Pakistan in C.P.L.A. No. 159/K/1989, dated 18-2-1998 in the case of Commissioner of Income Tax Companies II, Karachi v. Marck Sharp and Dhome of Pakistan Ltd., where the Hon'ble Supreme Court while giving a judgment on the applicability of section 42(2) of the Income Tax Act, 1922 which is somewhat pari materia to section 79 of the Income Tax Ordinance, 1979, had dismissed the petition for leave to appeal filed by the Commissioner of Income Tax. The learned counsel then submitted an order of this Court, dated 13-10-2005 in I.T.R.A. No. 76 of 2002 where this Court had admitted the following question of law for regular hearing:--

Whether the Income Tax Appellate Tribunal was justified in holding that the provisions of section 79 of the Income Tax Ordinance, 1979 were applicable to the appellant?

8. The learned counsel submitted that the facts of this case are identical to that case. However, the facts of the case are not narrated in the above judgment of this Court and we asked the learned counsel to show how in his case section 79 was not applicable and the reply of the learned counsel was that since the import price of the raw-material relied on by the Income Tax Officer was not substantiated, therefore, no addition under section 79 could have been made on mere presumptions and surmises.

9. Mr. Aqeel Ahmed Abbasi learned counsel for the respondent drew our attention to the order of the Tribunal in appeal and pointed out that nowhere it has been argued that the cost price relied on by the respondent was not substantiated and the Tribunal had on the basis of the appreciation of facts of the case decided the issue in favour of the respondent. The Tribunal also considered the concession of the learned counsel for the applicant that the argument that purchases cannot earn profit by themselves stand settled that no patent right is available to the respondent in respect of raw-material under consideration and that other points have also been decided by the Tribunal and the Sindh High Court against him but he is contesting the issue as final adjudication is required from the Hon'ble Supreme Court of Pakistan. For the above reasons, the Tribunal held that the Income Tax Officer had rightly applied section 79 of the Income Tax Ordinance, 1979 and vacated the order of the CIT(Appeals) and restored the addition made under section 79 by the Income Tax Officer. He stated that before the Tribunal the D.R. had also relied on the judgments of the Hon'ble Apex Court and this Court in various cases to point out that various contentions in respect of section 79 have already been settled by the Superior Courts in favour of the Department. Learned counsel further submitted that the applicant had filed miscellaneous application for rectification before the Tribunal, which was dismissed by the Tribunal by the order which has been annexed by the applicant. He referred to the same to point out that even in this rectification application, the applicant had not taken the point that the Tribunal had given no findings on his arguments that the cost price of the raw material relied on by the Income Tax Officer is not substantiated and he had not been confronted with the details of the case in which the raw material was imported at that price and, therefore, it stands proved beyond doubt that the applicant had not argued this point before the Income Tax Appellate Tribunal and, therefore, question No.8 does not arise out of the order of the Tribunal.

10. We have examined the proposed questions in the light of the .arguments of the learned counsel, the impugned order and the order of the Income Tax Appellate Tribunal in appeal and the assessment order and have also perused the judgments relied on by the learned counsel.

11. So far as question No.8 is concerned, we find that this point had not been argued by the applicant before the Income Tax Officer upto the Income Tax Appellate Tribunal and, therefore, no finding has been given by the Tribunal on this point. Even while filing miscellaneous application for rectification before the Income Tax Appellate Tribunal, the applicant had not pointed out that no finding had been given regarding his arguments on this point and, therefore, it is established that this point has not been agitated by the applicant at any stage of the proceedings and cannot be said to have arisen from the order of the Income Tax Appellate Tribunal and, therefore, we refuse to adjudicate on this question. The cases relied on by the learned counsel on this point are all distinguishable and not applicable to the facts of his case. Regarding the other questions we would observe that question No.2 does not arise out of the order of the Tribunal. Questions Nos.3 and 4 are based on the appreciation of the facts of the case while question No.5 again does not arise out of the order of the Tribunal. Questions Nos.6 and 7 also relate to finding of fact and, therefore, cannot be answered by this Court in exercise of its advisory jurisdiction under section 136(2).

12. Coming to the question No.1 we would like to refer to the following extract from the order of the Income Tax Appellate Tribunal.

4. -----------The learned D.R. has submitted that the first appeal was decided in the year, 1986 whereafter the point in issue has been considered in-depth and in broader perspective by this Tribunal as well as the Honourable High Court and Honourable Supreme Court of Pakistan particularly in .the following cases:--

(1) 1988 PTD (Trib.) 447 ITO v. Beecham Pakistan. Ltd.

(2) I.T.A. No. 2202/KB of 1987-88 Smith Kline and French of Pakistan Ltd. v. IAC Range-I, Companies-II, Karachi.

(3) I.T.A. No. 1796/KB of 1993-94, dated 14-9-1994 Messrs Bayer Pharma (Pvt.) Ltd. v. LT.O.

(4) 1991 PTD 393 Sindh High Court CIT v. Glaxo Laboratories Ltd.

(5) Civil Appeal No. 237-K -of 1991 Galaxo Laboratories Ltd. v. CIT Karachi (Supreme Court of Pakistan) order, dated April 21, 1992 (unreported).

5. In the above judgment it has been held that:--

(i) Purchases can generate profit.

(ii) The fact that pharmaceutical company had earned more profit as compared to the other companies is immaterial and the material point is that if there would have beets no arrangement of business between a resident and anon-resident owing to close connection between them the resident company would have earned more profits in the ordinary course of business.

(iii) If the Ministry of Health has allowed to import same raw material from different sources the presumption would be that the Ministry of Health has verified the efficacy of both the raw materials and has found them not injurious for human consumption and fit for manufacture of drug, of course the subsequent effectiveness of the drug depends on the expertise of the manufacturer of drug which has nothing to do with the efficacy of a particular raw material.

(iv) The fixation of selling price by the Ministry of Health does not depend entirely on the cost of raw material only. The cost of raw material is one of the component of cost structure and there are other major factors playing more important part in the costing of drug. The selling price of drug is fixed by the Ministry of Health on the basis of date furnished by the pharmaceutical companies and for the purpose of fixing the selling prices the Ministry of Health .has no scientific methods. Even Mr. Pasha with the assistance of an expert who assisted him in Court was not able to show any scientific and systematic method on the basis of which the selling prices are fixed by the Ministry of Health and thus more fixing of selling prices by the Ministry of Health on higher side is immaterial for the purpose of section 79 of the Income Tax Ordinance, 1979.

(v) Non availability of evidence with the Customs Authorities or any other authorities on the point of over invoicing is absolutely irrelevant for the purpose of Income Tax assessment.

(vi) For the purpose of attracting provisions contained in section 79 of the Income Tax Ordinance, 1979 there should be freedom of purchase and if some raw material is enjoying patent right then during the period 'of validity of patent right it would be deemed that there was no freedom of purchase and thus the provisions contained in section 79 shall not apply.

(vii) The registration of Trade Mark does not militate against the freedom of purchase of the raw material because the Trade Mark is in respect of finished products and not the raw material and lastly;

(viii) Any agreement between the resident company and the associated undertaking parent non-resident company creating restrictions on purchase of raw material from other sources shall not be deemed to be restriction on the freedom of purchase rather it will be deemed to be an arrangement between resident and non-resident company providing evidence that higher purchase price was agreed and paid as compared to the ruling international price with intention to deplete the profit of the resident company.

(6) On the other hand Mr. I.N. Pasha has conceded that the point that purchase can earn profit stands settled. He has further conceded that no patent right is available to the respondent in respect of the raw material under consideration. So far the other points are concerned Mr. Pasha has contended that although the Tribunal and the Sindh High Court have decided the issues against him but he is still contesting the issues as they required final adjudication by the Supreme Court of Pakistan.

(7) We have carefully considered the contentions raised by the learned representatives for the parties. The contention of Mr. Pasha that higher purchase prices paid by the respondent have resulted in higher sale prices and that the Ministry of Health has fixed the selling price for the sole reason that higher purchase prices were paid and, therefore, section 79 should not be applied is hereby repelled by placing reliance on the judgments cited above. It is held that the Assessing Officer rightly applied section 79 of the Income Tax Ordinance, 1979 in deleting the additions. The impugned direction of the learned CIT(A) is hereby vacated and the addition as made by the Assessing Officer under section 79 is hereby rested....

13. The Tribunal has accepted the arguments of the learned D.R. which are based on analysis of the judgments of the Honourable Supreme Court and this Court and the conclusion drawn by the Tribunal that the case of the applicant falls within the ambit of section 79 of the Income Tax Ordinance, 1979 are unexceptionable and no interference is called by this Court. We would also like to observe that we fully subscribe to the above conclusion. We have also perused the unreported judgment of the Honourable Supreme Court in Civil Petition No.159-K of 1989 and we find that it does not support the case of the applicant as in that case the Tribunal had given a finding of tact that there 'was no material before the Income Tax Officer to apply section 42(2) of Income Tax Act, 1922 and this Court and Apex Court had held that no question of law had arisen. We would, therefore, answer the question No. l in negative.

14. Foregoing are the reasons for which by our short order passed in Court on 16-5-2007 after hearing the learned counsel we had dismissed the above reference application in limine.

M.B.A./C-14/KReference application dismissed.