WAZIR ALI INDUSTRIES LTD. VS APPELLATE TRIBUNAL INLAND REVENUE, KARACHI, 2012 PTD-KARACHI-HIGH-COURT-SINDH 405 (2011)

(a) Words and phrases---

----"Prize"---Meaning---Word 'prize' covers a reward won by chance or offered for some achievement in normal course of some good performance.

Black's Law Dictionary and Chambers Dictionary (new edition) ref

(b) Income Tax Ordinance (XLIX of 2001)---

----Ss. 133, 156 [as amended by Finance Act (I of 2003)], 161 & 205---Term "prize offered for promotion of sale"---Scope---Withholding of tax---Plea raised by assessee was that no tax could be deducted on expenditure incurred on account of sales promotion, as sales incentive to distributor---Validity---Term "prize" did not merely refer to winning by chance but it also included regular payments either in cash or in kind to distributors on their achieving sales targets---Term "prize offered for promotion of sale" in S. 156 of Income Tax Ordinance, 2001, made the company liable to withhold tax on such payments---Such term covered free units given by assessee company to distributors on their achieving sales targets and the same were liable to withholding tax under S. 156 of Income Tax Ordinance, 2001---Recovery of such amount from assessee in terms of S. 161 of Income Tax Ordinance, 2001, as well imposition of default surcharge under S. 205 of Income Tax Ordinance, 2001, was also in accordance with law---Order passed by Income Tax Appellate Tribunal depicted correct position of law, hence required no interference by High Court---Reference was dismissed, in circumstances.

Commissioner of Income Tax/Wealth Tax v. Akhtar Munir and others 2007 PTD 1800 and Lone Cold Storage v. Revenue Officers 2010 PTD 2502 distinguished.

(c) Interpretation of statutes---

----Redundancy of provision---Harmonious construction---Scope---No redundancy can be attributed to the use of any word or phrase incorporated in any particular provisions of law by Legislature---Provision of statute would have to be construed harmoniously so as to advance the purpose of a substantive provision of law and to avoid conflict---No provision can be placed into service in order to defeat the real object of main provision---Effect must be given, if possible, to all words used in statutory provision.

Commissioner of Income Tax, Companies-I, Karachi v. Messrs Orix Leasing Pakistan Ltd., Karachi 2007 PTD 1151; Jamat-i-Islami Pakistan v. Federation of Pakistan PLD 2000 SC 111 and Messrs Bilz (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Multan and another 2002 PTD 1 (SC Pak) rel.

Abdul Rahim Lakhani for Applicant.

Jawaid Farooqi for Respondent No.3.

Date of hearing: 2nd December, 2011.

JUDGMENT

AQEEL AHMED ABBASI, J.---Being aggrieved and dissatisfied with the order dated 15-6-2010 passed by the Appellate Tribunal Inland Revenue (Pakistan) Karachi in I.T.A No.273/KB of 2010 (Tax Year 2008)theapplicanthasfiledinstantReferenceApplicationundersection 131 of the Income Tax Ordinance, 2001. The applicant proposed two similar questions which were argumentative and were not couched in proper format, hence could not be considered as questions of law arising from the order of the Tribunal. However, looking at the controversy involved in the instant case, following question of law has been refrained for an opinion by this Court:--

"Whether on the facts and circumstances of the case, the Appellate Tribunal was justified to hold that the prize offered by companies for promotion of sales as used in section 156 of the Income Tax Ordinance, 2001 covers the amount of free units given by the applicant company to the distributors towards sales promotion?"

2.Brief facts of this case as recorded by the Tribunal are that taxpayer is Public Limited Company engaged in the manufacturing of Vanaspati Ghee and Cooking Oils. During monitoring of withholding taxes, the Taxation Officer after examination of the annual statement filed under section 165 of the Income Tax Ordinance, 2001 along with audited accounts observed that the taxpayer has not deducted tax on expenditure of Rs.13,958,000 incurred on account of sales promotion, as sales incentive to distributor on which, in the opinion of the Taxation Officer, the taxpayer was obliged to deduct tax under the provisions of section 156 of the Income Tax Ordinance, 2001. A Show-Cause Notice dated 7-4-2009 was issued by the Taxation Officer in which besides other points, the non-deduction of tax under section 156 was confronted and taxpayer was asked to explain as to why tax at Rs.2,791,600 may not be collected under section 161 of the Income Tax Ordinance, 2001 along with additional tax at Rs.334,992 under Section 205 of the Income Tax Ordinance, 2001. While responding to such show cause the taxpayer replied that this amount is on account of sales related discount and volume related trade offers which is not hit by provisions of section 156 of the Income Tax Ordinance, 2001. Such explanation was not accepted by the Taxation Officer, while passing impugned order the Taxation Officer has observed as follows:--

"The word "Prizes and Winnings" is not defined in ITO 2001, however it has a very wider connotation, which encompasses even supply of free goods on account of sales promotion. Black Law Dictionary defines prize as, some thing of value awarded in recognition of a person's achievement". Moreover, the taxpayer itself accepts that it is a volume related offer. Further more during monitoring proceedings, the taxpayer has itself accepted that expenditure is incurred "on account of sales incentive paid to distributor on target achievement."

3.The order of the Taxation Officer was assailed by the taxpayer before the Commissioner Inland Revenue (Appeals-I) Karachi, who accepted the appeal of the taxpayer and deleted the tax demand created by the Taxation Officer under section 161 read with section 205 of the Income Tax Ordinance, 2001 with the following observations:--

"The word prize has not been defined in the statue so its literal meaning is to be taken. Black's Law Dictionary defines the word prize as under:

"Any thing offered as a reward of contest. A reward offered to the person who among several persons or among the public, at large, shall first (or best) perform a certain undertaking or accomplish certain conditions."

Considering the above definition in light of section 156 of the Ordinance, it is revealed that the essence of the words used in the section with context to prize i.e. prize on prize bonds, lottery, raffles, winning quiz, offered by companies for promotion of sales and cross words puzzle, which are all consumer public at large oriented, but in the appellant's case the offering of free units is only confined to its distributors, which seems to be trade oriented. Thus by its nature this scheme of the appellant will not qualify for inclusion in the definition of the word "prize" as envisaged in section 156 of the Ordinance."

4.The Commissioner Inland Revenue (Legal) Large Taxpayer Unit. Karachi, preferred an appeal before the Appellate Tribunal Inland Revenue (Pakistan) Karachi, who vide impugned order dated 15-6-2010 allowed the appeal of the department and has annulled the order passed by the Commissioner (Appeals). The applicant has assailed the above order of the Tribunal through instant Reference application and has proposed the above mentioned questions of law for opinion of this Court.

5.Learned counsel for the applicant has contended that the Taxation Officer and the learned Tribunal have misdirected themselves while treating the amount of sales promotion shown in the profit and loss account, as expense, instead of trade discount. Per learned counsel, the provisions of section 156 are required to be interpreted keeping in view the doctrine of ejusdem generic and the term prize has to be considered as governing feature for the purposes of interpretation of this Section. Learned counsel submitted that free goods given to the distributors are not covered in the definition of prize as envisaged in the provision of section 156 of the Income Tax Ordinance, 2001. These goods cannot be termed prize as prize can only be won by chance and not by achieving the sales targets. It is further contended by the learned counsel that the amount is spent for promotion of sales whereas this is part of normal business transaction between the applicant and distributors. Per learned counsel granting of free units to the distributors is not advantage in the nature of prize whereas distributor is not entitled for such advantage by chance as he has to work hard to achieve the targets. Learned counsel also readout the provision of section 156 of the Income Tax Ordinance, 2001, and submitted that the term prize offered by companies for promotion of sale has to be read by applying the principle of 'ejusdem generis'onlyandnowidermeaningcanbegiventothistermwhichper learned counsel, is not the intent of legislature. Learned counsel further argued that it is settled principle of interpretation of taxingstatutethatincaseofanyambiguityintaxingprovisions,the construction one favouring taxpayer shall be acted upon. In support of his contention, the learned counsel has placed reliance in the case of (i) Commissioner of Income Tax, Companies-I, Karachi v. Messrs Orix Leasing Pakistan Ltd., Karachi 2007 PTD 1151, (ii) Commissioner of Income Tax/Wealth Tax v. Akhtar Munir and others 2007 PTD 1800 and Lone Cold Storage v. Revenue Officers 2010 PTD 2502.

6.Conversely, learned counsel for the respondent has supported the impugned order passed by the Tribunal, which according to learned counsel is based on proper appreciation of facts and correct application of law. Per learned counsel, there has been an amendment in Section 156 wherein by Finance Act, 2003, whereby the term prize on winning a quiz, prize offered by companies for promotion of sale has been inserted. Learned counsel for respondent has submitted that the legislative intent has been reflected in the clear and unambiguous words by specifically including the term prize offered by companies for promotion of sale, hence every company offering anything for promotion of sales either in cash or in kind has been made liable to deduct tax from the amount paid to any person and such amount collected shall be final tax on the income from prizes or winning referred to in the said subsection. Learned counsel further argued that since the taxpayer itself has shown the amount of Rs.13950000 as an expenditure towards sales promotion in the profit and loss account, therefore, the same is subject to withholding tax under section 156 of the Income Tax Ordinance, 2001. Per learned counsel, here the term prize does not merely refer to winning by chance but it also includes the regular payments either in cash or in kind to the distributors on their achieving sales targets, hence this expenditure towards sale promotion is liable to withholding tax under section 156 of the Income Tax Ordinance, 2001. While concluding the arguments, learned counsel has submitted that after amendment in section 156 by Finance Act, 2003 the amount of expenditure towards sales promotion by a company has been subjected to withholding tax and in case of failure on the part of payer, the same can be recovered in terms of section 161 along with additional tax under section 205 of the Ordinance, 2001.

7.From perusal of the order passed by the Taxation Officer, Large Taxpayers Unit, Karachi. It is seen that the taxpayer was confronted with the impugned demand under sections 161/205 of the Income Tax Ordinance, 2001 in the following manner:--

"You have contended that Rs.13,958,000 were incurred on account of sales promotion as sales incentive to distributor. Under section 156 of ITO, 2001, you were legally bound to deduct tax at Rs.2,791,600. Please show cause as to why not tax at Rs.2,791,600 may be collected under section 161 of ITO, 2001 along with additional tax at Rs.334,992 under section 205 of ITO, 2001."

In response to hereinabove query, the taxpayer asserted that it is on account of sales related discount and volume related trade offers, which is not hit by section 156 of the Income Tax Ordinance, 2001. The taxpayer further accepted that the expenditure is incurred on account of sales incentive paid to distributor on target achievement. Similarly, before the Commissioner of Income Tax (Appeals) taxpayer has reiterated the same contention and has further asserted that as incentive scheme was launched by the appellant to its distributor, which activity is the normal business practice whereby extra units are given to the distributors, to encourage them to achieve certain fixed sales target. It has been asserted that the scheme is a routine commercial activity, which does not attract the provision of section 156 of the Income Tax Ordinance, 2001.

8.The term "trade discount" can be safely defined as a sum of money or percentage of the usual cost prize that a trader who is usually in the same kind of business as the buyer, deducts from the cost of the goods or service. If such amount relates to purchases or cost of goods the same is reflected in the trading account, whereas if it relates to sales the same is reflected in the profit and loss account. In the instant case admittedly the taxpayer has shown the amount under dispute as an expense towards sales promotion, therefore, the contention of the Taxation Officer that the same should have been reflected in the trading account appears to be misconceived. However, the only controversy in the instant case is to examine as to whether the amount of expense shown towards sales promotion by the taxpayer is liable to withholding tax under section 156 of the Income Tax Ordinance, 2001 or not.

9.Having noted the factual assertions made by taxpayer as well as the Taxation Officer regarding the nature of the expenditure under dispute, we would now examine the provision of section 156 as well as section 161 of the Income Tax Ordinance, 2001 to see as to whether the amount shown as an expenditure in the account by the taxpayer falls within the provision of section 156 of the Income Tax Ordinance, 2001 or not. It will be advantageous to reproduce the provision of section 156 as well as section 161 as follows:--

"156. Prizes and winnings.---(1) Every person paying prize on a prize bond, or winnings from a raffle, lottery, (prize on winning a quiz, prize offered by companies for promotion of sale,) or cross-word puzzle shall deduct tax from the gross amount paid at the rate specified in Division VI of Part III of the first Schedule.

(2)Where a prize, referred to in subsection (1), is not in cash, the person while giving the prize shall collect tax on the fair market value of the prize.

(3)The tax deducted under subsection (1) or collected under subsection (2) shall be final tax on the income from prizes or winnings referred to in the said subsections.

161. Failure to pay tax collected or deducted.---(1) Where a person--

(a)fails to collect tax as required under Division-II of this Part or deduct tax from a payment as required under Division-III of this Part or as required under section 50 of the repeated Ordinance; or

(b)having collected tax under Division II of this Part or deducted tax under Division III of this Part fails to pay the tax to the Commissioner as required under section 160, or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under subsection (8) of section 50 of the repeated Ordinance.

The person shall be personally liable to pay the amount of tax to the Commissioner who may pass an order to that effect and proceed to recover the same.

(IA) No recovery under subsection (1) shall be made unless the person referred to in subsection (1) has been provided with an opportunity of being heard.

(IB) Where at the time of recovery of tax under subsection (1) it is established that the tax that was to be deducted from the payment made to a person or collected from a person has meanwhile been paid by that person no recovery shall be made from the person who had failed to collect or deduct the tax but the said person shall be liable to pay at the rate of eighteen per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid.

(2)A person personally liable for an amount of tax under sub-section (1) as a result of failing to collect or deduct the tax shall be entitled to recover the tax from the person from whom the tax should have been collected or deducted.

10.It may be noted that initially the phrase prize on winning a quiz and prize offered by companies for promotion of sale were not included in section 156, whereas it was meant only for payment towards prize on a prize bond, or winnings from a raffle, lottery, cross-word puzzle. However, by Finance Act, 2003 the phrases prize on winning a quiz, prize offered by companies for promotion of sale have also been included in section 156, which makes a company liable to deduce tax fromthegross-amountpaidtowardssalespromotionattheratespecified in Division VI of Part III of the First Schedule. Subsection (2) of section 156 further clarifies that prize referred to subsection (1) is not restricted to cash payments but it also includes the fair market value of the prize which may be in kind. The amount of tax deducted under subsection (1) or collected under subsection (2) is treated as final tax on the income from prize or winning referred to in the subsections. However, where a person fails to collect or deduct tax from a payment he is personally liable to paytheamountoftaxtotheCommissionerin terms of section 161 of the Ordinance, 2001 whereas provision of section 205relatingtodefaultsurchargemayalsobeattracted.Section 161 further provides that where at the time of recovery of tax under subsection (1) it is established that the tax that was to be deducted from the payment made to a person or collected from a person has in the meanwhile been paid by that person, no recovery shall be made from the person who had failed to collect or deduct the tax but the said person shall be liable to pay default surcharge at the rate of 18% per annum from the date he failed to collect or deduct the tax to the date the tax was paid. It further provides that a person personally liable for an amount of tax under subsection (1) as a result of failing to collect or deduct the tax shall be entitled to recover the tax from the person from whom the tax should have been collected or deducted. The taxpayer under the circumstances is treated as withholding agent whereas in case of default, he is treated as assessee in default.

11.The term prize has not been defined in the Income Tax Ordinance, 2001, therefore, it is always recommended to refer to the dictionary meaning of the term in order to ascertain the literal meaning. Learned Tribunal, while dealing with such proposition has taken into consideration the meaning of the word 'prize' as defined in Black's Law Dictionary as well as in Chambers Dictionary (newedition), which is reproduced hereunder for the sake of brevity:--

BLACK'S LAW DICTIONARY

"Prize. Anything offered as a reward of contest. A reward offered to the person who, among several persons or among the public at large, shall first (or best) perform of a certain undertaking or accomplish certain conditions. An award or recompense for some act done; some valuable thing offered by a person for something done by others. It is distinguished from a "bet" or "wager" in that it is known before the event who is to give either the premium or the prize, and there is but one operation until the accomplishment of the act, thing, or purpose for which it is offered.

The fair market value of prize or award is generally includible in gross income. Certain exception are provided where the prize or award is made in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement providing certain other requirements are met. I.R.C. 74.

(14)Again a reference is made to meaning of word 'prize' in the Chamber Dictionary given as under:--

CHAMBERS DICTIONARY (NEW EDITION)

"Prize 1 (Spenser, Shakesp prise) priz. n a reward or symbol of success offered or won in competition by contest or chance, or granted in recognition of excellence; any thing well worth striving for; a highly valued acquisition; privilege or advantage (Shaksp) esteem (Spenser); valuation appraisal (Shakesp) _____adj awarded, worthy of, or constituting a prize; treasured; (ironically) perfect, great (as in a prize fool). ______ vt to pryse) to value; to value highly; to set a prize on (abs); (spenser pryse) to pay for _______ adj pri'zable valuable ______ adj prized valued highly; treasured. ____ n pri'zer (rare) an appraiser, _____ prize list a list of winners; prize man or prize' woman a winner of a prize esp an academic prize; prize _____ winner. (A differentiated form of price and praise, from OFr pris (n) and priser (vb) from L pretium price)

Prize 2 (Spenser, Shakes prise) priz. n that which is taken by force, or in war, esp a ship; seizure (obs) ______ vt to make a prize of _____ prize court a court for judging regarding prizes made on the high seas; prize crew a crew put abroad a prize to bring her to part; prize money share of the money or proceeds from any prizes taken from an enemy, (Fr prise capture, thing captured. from L praehensa, feminine pa p of paraehendere to seize).

12.After having examined the definition of the term 'prize' referred to hereinabove the Appellate Tribunal has interpreted the word 'prize' in the following manner:-

"Perusal of the meaning of word "prize" in both the dictionaries mentioned above is a reward offered to the person or won by person in competition through contest or by chance. It is a reward or compensation granted in the recognition of excellence. The meaning given to the word "prize" in both these dictionaries therefore covers a reward won by chance or offered for some achievement in normal course of some good performance. The meaning of the word "prize" in Black Law Dictionary negates the contention of learned CIR (Appeals-1) that "prize" can only be won by chance when it describes prize is distinguished from a "bet" or "wager" in that it is known before the event. The Chamber Dictionary even goes to the extent that things even taken by force or seizure are included in definition of "prize". These meaning of the word "prize" totally discards the impression that "prize" can only be won by chance. Therefore, the interpretation by the learned CIR (Appeals-I) that the prize can be won by chance is totally misplaced keeping in view the meaning of the word "prize" given in the above two dictionaries. This is however surprising that the learned CIR (Appeals-I) refers to the dictionary meaning of the word "prize" but subsequently does not follow the meaning given by the dictionary to the word "prize"."

13.On examination of the facts of the instant case, we have noted that free units were given to the distributors not at the time of supply/sales but these free units were given when certain targets were achieved by the distributors, whereas such amount has been shown as an expense towards sale promotion. From perusal of the definition of the term `prize' as given in Black's Law Dictionary and Chambers Dictionary hereinabove, it is noted that the word 'prize' covers a reward won by chance or offered for some achievement in normal course of some good performance. In the instant case, admittedly the expenditure has been shown as an expense towards sales promotion made by the company to the distributor in the form of free units on achieving sales targets which in our view is in the nature of prize offered by companies for promotion of sale. The term prize does not merely refer to winning by chance, but it also includes regular payments either in cash or in kind to the distributors on their achieving sales targets. We are of the view that the term prize offered for promotion of sale in section 156 makes the company liable to withhold tax on such payments.

14.While interpreting the newly inserted phrase "prize offered by companies for promotion of sale" we will have to keep in mind the legislative intent which has been expressed through amendment insection 156. The same can possibly be ascertained by interpreting the said phrase in its entirety instead of attempting to interpret the individual words used therein. The term prize used in the instant phrase has to be interpreted in such a manner which may co-relate with the remaining words of the entire phrase so it may reflect the true intention of the legislature. We are mindful of the principle of interpretation of statutes that "no redundancy can be attributed to the use of any word or phrase incorporated in any particular provision of law by the legislature". Provision of statute would have to be construed harmoniously so as to advance the purpose of a substantive provision of law and to avoid conflict. No provision can be placed into service in order to defeat the real object of the main provision. Effect must be given, if possible, to all the words used in statutory provision. Reference in this regard can be made to the reported case of Commissioner of Income Tax v. Messrs Orix Leasing Pakistan Ltd., Karachi 2007 PTD 1151 and Jamat-i-Islami Pakistan v. Federation of Pakistan PLD 2000 SC 111.

15.It will be advantageous to refer to the judgments, already taken cognizance by the Tribunal, of the Hon'ble Supreme Court of Pakistan in reported case of Messrs Bilz (Pvt.) Ltd. v. Deputy Commissioner of Income Tax, Multan and another 2002 PTD 1 (SC.Pak), wherein it has been held as under:--

"It may be noted that according to the settled principle of law that a fiscal statue has to be construed in its true perspective and in respect of payment of income tax, if it is found due against a party, then such statute cannot be interpreted liberally in order to make out a case in favour of an assessee who has failed to pay the tax."

In another reported judgment Jamat-i-Islami Pakistan v. Federation of Pakistan PLD 2000 SC 111, the Hon'ble Supreme Court has held as under:--

"It is the duty of the Court to find out the true meaning of a statue while interpreting the same. The general rule is that the Courts adopt as uniform an approach as possible to the reading of ambiguous Act of Parliament which are some times imperfect. obscure and vague. The primary rule of interpretation of statutes is that the meaning of the Legislature is to be sought in the actual words used by him which are to be interpreted in their ordinary and natural meanings. The cardinal rule for the construction of Acts of Parliament is that they should be construed according to the intention expressed in the Acts themselves. Where the language of the statue is plain and unambiguous and conveys a clear and definite meaning, there is no occasion for resorting to the rules of statutory interpretation, and the Court has no right to impose another meaning or to read into its limitations which are not there based on a prior reasoning as to the probable intention of the Legislature. Court can resort to the proceedings of the Legislature when the language employed is ambiguous."

It may be observed that the case-law relied upon by the learned counsel for the applicant is of no assistance to the applicant as the same is based on distinguishing facts, whereas the principles of interpretation for taxing statute as laid down in these judgments, advance the case of respondent.

16.In view of hereinabove, we are of the view that the phrase prize offered by a company for promotion of sales used in section 156 of the Income Tax Ordinance, 2001 covers the free units given by applicant's company to distributors on theirachievingsalestargetsandthesameare liable to withholding tax under section 156 of the Income Tax Ordinance, 2001. Recovery of such amount from the applicant in terms of section 161 as well imposition of default surcharge under section 205 of the Income Tax Ordinance, 2001, under the facts andcircumstances of this case, is also in accordance with law. The order passed by the Tribunal depicts the correct position of law, hence requires no interference by this Court. Accordingly, we dismiss the instant Reference Application and answer the question proposed in affirmative against the applicant.

M.H./W-13/KReference dismissed.