COMMISSIONER (LEGAL DIVISION), KARACHI VS NOVARTIS PHARMA (PAKISTAN) LTD., 2009 PTD-KARACHI-HIGH-COURT-SINDH 891 (2009)

(a) Words and phrases---

----"Commission"---Meaning.

Oxford English Dictionary; English Dictionary on historical principles (reprint 1961) and Commercial Dictionary by P.G, Osborn and ST. Grandage (1966) ref.

(b) Words and phrases---

----"Reimburse" and "Reimbursement"---Meaning.

Oxford English Dictionary on historical Principles (1993) and Advanced Law Lexicon (Third Edition) (P. Ramanatha Aiyar) (2005) ref.

(c) Words and phrases---

"--"Commission" and "reimbursed" or "reimbursement", Distinction stated.

The term "commission" denotes remuneration or compensation to a factor or an agent for services rendered in respect of making sale or otherwise. It is generally calculated as a certain percentage on the amount of the transaction or on the profit to the principal. Whereas the term "reimbursed"/"reimbursement" implies payback and in ordinary parlance reimbursement means repayment of what has been spent. Each word denotes a particular and specific concept without the one including other, as such, both have different meaning.

(d) Income Tax Ordinance (XXXI of 1979)---

----Ss. 50(4A) & 52---Non-deduction of tax on payment made by assessee as reimbursement of expenses to distribution company for distributing its products as per distribution contract---Assessing Officer treated assessee in default after equating such payment as commission---Validity---Word "commission" denoted remuneration or compensation to an agent for services rendered in respect of making sale---Word "reimbursement" would mean repayment of amount spent---Both such words had different meanings---Record showed that distribution company had performed certain functions in connection with distribution of products of assessee---Distribution company for such services was to be paid certain fee for expenses incurred, which , expenses had been reimbursed by assessee---Assessing Officer had not challenged validity of reimbursement---Record showed that distributing company had deducted tax under S. 50 of Income Tax Ordinance, 1979---Such expenses reimbursed by assessee could not be treated as commission---High Court answered question in favour of assessee.

Harihar Cotton Pressing Factory v. Commissioner of Income Tax, Bombay North (1960) 39 ITR 594 and Laxmandas Sejram v. Commissioner of Income-Tax, Gujarat (1964) 54 ITR 763 ref.

Aqeel Ahmed Abbasi for Applicant.

ORDER

ARSHAD SIRAJ MEMON, J.---Through this Income Tax Reference Application, filed under Section 133 of the Income Tax Ordinance 2001, the Applicant has proposed following questions for the opinion of this Court said to be arising out of the order of learned Income Tax Appellate Tribunal in I.T.A. No.366/KB of 2003 for the Assessment Year 1999-2000,

(i) "Whether on the facts and in the circumstances of the case, the learned ITAT was justified in holding that the payment made to Messrs Lasani Pak. Limited by Messrs Novartis Pakistan was not commission?"

(ii) "Whether under the circumstances of the case, the learned ITAT was justified in giving its finding on the basis of the form of the agreement Messrs Novartis Pharma Pakistan and Messrs Lasani Pak. Private Limited?"

Mr. Aqeel Ahmed Abbasi, learned counsel for the Applicant argued the matter and invited our intention to the facts of the case.

From perusal of the record, the brief facts are that an Order under section 52 of the Income Tax Ordinance, 1979 (hereinafter referred to as the said "Ordinance") was passed in which the Deputy Commissioner of Income Tax treated the respondent as "Assessee in default" under the provisions of Section 52 of the Ordinance, on the premise that the assessee has not deducted tax on the payment made as reimbursement of expenses to Messrs Lasani Pak. Private Limited, which was treated as "Commission" by the Deputy Commissioner of Income Tax and he was of the view that the respondent company should have deducted tax under the provisions of section 50(4A) of the Ordinance. 1979.

The Assessee/respondent in the said proceedings contended that according to the distribution agreement entered into between the respondent and Messrs Lasani Pak. (Pvt.) Limited, the said Company was required to perform all functions relating to the distribution of pharmaceutical products. It was contended that in consideration of the performance of these functions, the respondent company reimbursed Messrs Lasani Pak. Private Limited of the expenses actually incurred and borne by them in connection with the distribution of the products of the respondent company. It was brought to the notice of the Deputy Commissioner Income Tax that Messrs Lasani Pak. Private Limited was entitled according to terms of the agreement to a fee calculated at the agreed rate of such expenses. The respondent Company provided details of the expenses reimbursed and the copies of the relevant documents. It was further contended that the term "reimbursement" cannot be equated with the term "commission". It was also brought to the notice of the Deputy Commissioner of Income Tax that the company has duly deducted Income Tax under the provisions of section 50 (4) on the entire amount i.e. reimbursement of expenses and service charges. The aforesaid contentions were not accepted by the Deputy Commissioner of Income Tax as he equated the amount of reimbursement as commission, and by placing reliance on two judgments of Indian Jurisdiction in which the expression "commission" has been dealt with, he accordingly passed an order under Section 52 treating the respondent as "Assessees in default".

The respondent preferred first Appeal before the Commissioner of Income Tax (Appeals) who vide Appellate Orders Nos.38-39 dated 30-12-2002 examined the case and came to the conclusion that so far as the amount of reimbursement is concerned, same cannot be equated with the expression "commission". However, he agreed with the Deputy Commissioner Income Tax to the extent that the service charges were in the nature of "commission" which attracts the provisions of section 50(4A) of the Ordinance. He, therefore, held the order passed by the Officer was correct to the extent of service charges only.

The respondent as well as the applicant preferred Appeals before the learned Income Tax Appellate Tribunal. The learned Tribunal examined the contention of the respondent as well as of the applicant and after examining the agreement entered into by the respondent with Messrs Lasani Pak. (Private) Limited with regard to distribution of pharmaceutical products, it concurred with the view of the Commissioner of Income Tax (Appeals).

Mr. Aqeel Ahmed Abbasi learned counsel for the applicant has submitted that in view of the nature of transaction vis-a-vis fixation of rate by the parties, payment made by the respondent the "reimbursement" of expenses and service charges falls within the scope of the term the "commission". He further urged that the learned Tribunal has not dilated upon the terms of the agreement in correct perspective as the learned Tribunal has merely based the decision on form of the agreement.

We have considered the argument of learned counsel for the applicant and have minutely examined the orders passed by the authorities below.

To appreciate the arguments of the learned counsel it may be appropriate to reproduce the provisions of subsection (4 A) of Section 50 and Section 52 of the Ordinance.

Section 50.

"[(4A) Any person responsible for making any payment in full or in part (including a payment by way of advance) to any person, on account of brokerage or commission on behalf of the Government, a local authority, a company, a registered firm or foreign contractor or consortium shall deduct tax at the time of making such payment, at the rate specified in the First Schedule:"

"Provided that where any person receives payment on behalf of his principal and remits it after deducting his commission such commission shall be deemed to have been paid to him and the tax shall be collected by such principal.]"

Explanation.---For the purposes of this section, the Deputy Commissioner having jurisdiction under section 5 over the case of the assessee in default may initiate action.

Section 52.

"Liability of persons failing to deduct or pay tax.---Where any person fails to deduct or collect, or having deducted or collected as the case may be, fails to pay the tax as required by, or under section 50, he shall, without prejudice to any other liability which he may incur under this Ordinance, be deemed to be an assessee in default in respect of such tax."

It will be also advantageous to reproduce the relevant clause of the agreement entered into between the Respondent in this case with Messrs Lasani Pak. (Pvt.) Limited:---

"In consideration of the performance of the functions by LPL under this Agreement, SPL shall reimburse to LPL all expenses incurred on behalf of SPL for performing the functions and also pay a fee of 7.5 % of such expenses or such other rate as may be agreed upon mutually in writing from time to time LPL will provide such evidence including relevant extracts from books of account and copies of receipts and vouchers as SPL may required from time to time to substantiate a claim for reimbursement of the fully said expenses."

The Deputy Commissioner of Income Tax has treated the reimbursement of expenses as "commission" and has relied on two cases of Indian jurisdiction reported in (1960), 39 ITR 594 (Harihar Cotton Pressing Factory v. Commissioner of Income Tax, Bombay North) and other case reported in 1964 54, ITR 763 (Laxmandas Sejram v. Commissioner of Income-Tax Gujarat) to support his view.

The Commissioner of Income Tax (Appeals) after considering the arguments and perusal of the record came to the following conclusion:---

"I have gone through the issue in detail vis-a-vis, distribution agreement between parties to the contract and the related documentation between the parties. The issue is two fold. One is related to the reimbursement of actual expenses incurred by the LPPL for distribution of NPL products and the other issue is related with the service charge paid by NPL to LPPL in consideration distribution of its products. Regarding reimbursement of expenses I have minutely gone through the clauses of the distribution contract which clearly shows that the LPPL performs specific function i.e. booking of orders, maintaining storage facilities, handling of inventories, invoicing to customers, transportation to depots, maintaining receivable and inventory records. All the above activities which were performed by LPPL on behalf of NPLI for which NPL reimburses actual cost on the basis of evidence of expenses submitted by NPL. On the other hand if we analyze the transaction in the way that the NPL has its own distribution department then the appellant has to maintain is entire distribution network which definitely perform the above noted functions which LPPL is now performing on behalf of NPL, then the NPL must claim the said distribution network cost in its accounts. In the instant case the above functions are formed by the LPPL for which the appellant has reimbursed actual cost of said functions, therefore, to term "commission" to much reimbursement is not the correct approach. Needless to say that LPPL has duly deducted tax on payment of all expenses, wherever required. Hence the question of deduction of tax under Section 50 of the Ordinance on reimbursement does not arise. I have gone through the unreported judgment of the learned ITAT cited by the AR which also confirms the above view. In the light of above discussion I am of the considered opinion that reimbursement of expenses does not come under the ambit of commission and consequently the provisions of section 50 of the Ordinance does not attract on it. Regarding the issue of service charges paid by the NPL to LPPL I am totally agreed with the views of the learned DCIT that the said service charges are in the nature of the commission and consequently attracts the provisions of section 50(4A) of the Ordinance in respect of the deduction of tax on it. I, therefore uphold the order of the DCIT passed under section 52 of the Ordinance to the extent of payment of service charges only."

As observed above, the learned Income Tax Appellate Tribunal after considering the arguments of the parties and relevant clause of the agreement concurred with the conclusion of the Commissioner of Income Tax (Appeals).

In order to resolve the controversy it may be noted that the word "commission" as used by the legislature in subsection (4A) of section 50 has not been defined in the Ordinance, as such, common dictionary meaning has to be considered. The word "commission" has been defined by various dictionaries as stated herein under.

"COMMISSION"

11. A remuneration for services or work done as agent, in the form of a percentage on the amount involved in the transaction: a pro rata remuneration to an agent as a factor.

The Oxford English Dictionary. A new English Dictionary on historical principles (reprint 1961).

COMMISSION (1) An order or authority conferred on a person or body of persons to do an act or exercise powers: e.g. an officer in the armed forces.

(2) The body charged with commission form Crown, e.g. Nation Park Commission.

(3) The used remuneration of an agent.

(4) An authority, being an order issued by a court, to examine parties or witnesses, who owing to absence abroad, to illness, cannot be present at the hearing.

The concise Commercial Dictionary by P.G, Osborn and ST. Grandage (1966).

Since in the present case as per the terms of the, agreement the respondent's contention is that the amount is not the "commission" but the "reimbursement" for facilitation for better understanding, the expression "reimburse" and "reimbursement" as defined in the ordinary dictionaries have also been considered by us.

The New Shorter Oxford English Dictionary on historical Principles (1993).

Advanced Law Lexicon (Third Edition) (P. Ramanatha Aiyar) (2005)

The term "commission" denotes remuneration or compensation to a factor or an agent for services rendered in respect of making, sale or otherwise. It is generally calculated as a certain percentage on the amount of the transaction or on the profit to the principal. Whereas the term "reimbursed"/"reimbursement" implies payback and in ordinary parlance reimbursement means repayment of what has been spent. It is, therefore, observed that each word denotes a particular and specific concept without the one including other, as such, both have different meaning.

Having considering the scope of expression "commission" and "reimbursement" and considering the provision:, of agreement entered into between the parties, in our considered view the amount reimbursed by the Respondent Company to Messrs Lasani Pak. (Private) Limited cannot by, any stretch of imagination be treated as "commission". The terms of the agreement clearly shows and it has come on record that Messrs Lasani Pak. (Private) Limited performed certain functions in connection with distribution of certain pharmaceutical products of the respondent such as:

1. Booking of orders.

2. Maintaining necessary storage facilities.

3. Handling Inventories and deliveries etc.

4. Invoicing to customers.

5. Collection from customers and depositing in bank accounts of buyor appellant.

6. Transporting the goods from factory to various depots and also from depot to depot.

7. Accounting of receivables and inventories.

8. Other acts agreed upon mutually from time to time.

The respondent for such service paid fee equal to 7.5 % of the said expenses incurred and that the expenses incurred were reimbursed by the respondent. The Deputy Commissioner of Income Tax has not challenged the validity of the reimbursement and it has also come on record as observed by the Commissioner of Income Tax (Appeals) in his Appellate order that the distributing company had in fact deducted tax under the provisions of section 50. Keeping in view the above fact and discussion, the Deputy Commissioner of Income Tax erred in law to treat "reimbursement" of expenses as "Commission".

We have also considered the judgments relied upon by the Deputy Commissioner of Income Tax which has been referred by us in the preceding paragraph. It is observed that both the judgments are quite distinguishable to the facts of present case. In case of (Harihar Cotton Pressing Factory v. Commissioner of Income Tax, Bombay North) referred supra, the Bombay High Court has made distinction between expressions "commission" and "rebate" with reference to section 10(2) (xv) of the Income Tax Act, 1922. The case does not bring out the distinction between the expressions the "commission" and the "reimbursement". It may be mentioned that in the aforesaid judgment while distinguishing the terms "rebate" and "commission" it was rightly observed that the expression "commission" has no technical meaning but both in legal and commercial acceptation of the term it has defined signification and is understood as an allowance for service or labour in discharging certain duties such for instance of agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders same service to another. It has been observed that mostly it is a percentage on price or value or upon the amount of money involved in any transaction of sale or service or the quantum of work involved in a transaction. It can be for variety of service and is of the nature of recompense or reward for such services. In the other case referred by Deputy Commissioner of Income Tax (Laxmandas Sejram v. Commissioner of Income-Tax, Gujarat) referred supra, the Gujarat High Court examined the expression "commission" and "bonus" with reference to section 10(2)(x) and (xv) of the Indian Income Tax Act, 1922 with reference to ex-gratia payments payable under contract.

In view of the above discussions, we are of the considered opinion that the action of treating the "reimbursement" of expenses in the facts and circumstances of this case (underlined for emphasis) was not legally justified and the Commissioner of Income Tax (Appeals) and the learned Income Tax Appellate Tribunal correctly appreciated the facts. The distinction made between the expression "commission" and "reimbursement" with reference to the substance of transaction, was correctly made which needs no interference. So far as the deduction of Tax on service charges is concerned same is not the subject matter of the present Income Tax Reference Application and we, therefore, refrain to give any opinion.

In view of the above, both the proposed questions are answered in affirmative i.e. against the applicant and in favour of the respondent.

The above Income Tax Reference Application is dismissed in limine.

S.A.K./C-8/KAnswer in negative.