2026 PLP 173 (PTD)

SARDAR EJAZ ISHAQ KHAN, J.

By this common judgment, we decide the above mentioned reference applications filed under section 34A of the Federal Excise Act, 2005, for the tax years 2010 to 2013. The following questions of law were framed vide order dated 23.02.2016:

1. Whether the learned ATIR failed to consider that the show cause notice dated 21.08.2014 in respect of tax year 2010 was time-barred according to section 14 of the FED, prior to its amendment made through the Finance Act 2011?

2. Whether the O&M Agreement between the Applicant and IPGDL creates a "franchise" as defined under Section 2(12) of the Act, between the parties, thus attracting the levy of FED, under Section 3(1)(d) of the Act, on the payments made by the Applicant to IPGDL under the O&M Agreement? We proceed to answer question No.2 first

2. Vide notice dated 21.08.2014, the department called upon the applicant Hub Power Company Limited (HPCL) to show-cause why Federal Exercise Duty (FED) should not be recovered from it for tax years 2010 to 2013 on account of 'Franchise Service, Royalty or Technical Services Fee' in the sum of circa Rs. 10.344 million in respect of the services obtained by HPCL from its associated company, International Power Global Development Limited (IPGDL), under an Operations and Maintenance (O&M) contract between the two.

3. UPCL is an independent power project set up pursuant to an Implementation Agreement with the Government of Pakistan. It is the industry norm for the operations and maintenance of a power plant to be carried out, for consideration, by a separate company qua an O&M contractor, who may or may not be an associated company of the power plant owning company. The O&M cost is one of the major cost components for an IPP. It is a cost borne to operate and maintain the power plant.

4. The order-in-original dated 17.01.2015 relied on note No.27.1 of HPCL's annual report for the period ending on 30.06.2010, and similar notes in subsequent annual reports, to conclude that there existed ...a relationship of holding company between IPGDL and HPCL. The order-in-original jumped from the finding of inter se shareholding between IPGDL and HPCL to the conclusion that such shareholding in and of itself constituted a franchise between the two by virtue of the definition of 'franchise' given in section 2(12a) of the Act and rule 43A (1) of the Federal Excise Rules, 2005. Rule 43A(1), in so far as material, is reproduced below: Rule 43A (1) Every person, firm or company, hereinafter referred to as franchisee, using the right to deal with the goods or services of the franchiser under a franchise agreement against a predetermined fee or royalty . shall obtain federal excise registration... 2) The duty shall be paid by the franchisee, or the case may be, the head office of the franchisee at the tate of 10% of the value of taxable service.... In 2008, section 2(12a) was inserted in the Federal Excise Act to define a franchise as follows: "franchise" means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved."

5. The tax years in question fall after section 2(12a) was added in 2008, and so we do not understand how the reliance by the adjudicating forums below on Rule 43A was valid, given that the statutory definition of the term franchise was to prevail over its sub-statutory definition that existed prior to the insertion of the statutory definition.

6. It is an admitted position that an O&M contract stands signed between IPGDL and HPCL. In order for the department to succeed, it had to show that the O&M contract was indeed a franchise agreement constituting a franchise. We pause here to note that both the order-in-original and the appellate order of the Commissioner (Appeals) have been outrightly ambiguous as to who is the franchiser and who the franchisee, as both of them solely on the basis of shareholding by IPGDL in HPCL have proceeded to conclude the existence of a franchise relationship for that very reason. The learned ATIR vide its impugned order dated 24.11.2015 also concluded similarly.

7. Apart from the sheer absurdity of inferring a franchise relationship solely for the reason of one company's shareholding in another, the commercial relationship between IPGDL and HPCL, does not constitute a franchise by any principle known to law. Vide its judgment in Pakistan Television Corporation v. Commissioner Inland Revenue (2023 PTD 102), Division Bench of this Court, after analyzing precedent, laid down the ingredients of a franchise as defined in section 2(12a) as follows: The ingredients to inter a franchise under section 2(12a) of the Act are 5 in number, namely, (i) authority by the franchiser, (ii) the resultant right acquired by the franchisee, (iii) the franchised service or product, (iv) the fee therefor, and (v) the identification of the product or service with the franchiser. All the impugned orders, however, focus only on the first 4 ingredients, and leave out the most critical ingredient No. (v). Not keeping the identified with the franchiser ingredient as the overriding one leads to reductio ad absurdum, reducing the myriad business relationships in an economy, recognized as legally distinct relationships with distinctly pecullar characteristics, to one single description, for then the legal doctrines of agency, construction, charterparty, outsourcing, advertising, transportation, and well-night all else will be reduced to the singular description of franchise as they all contain the ingredients (i) to (iv) noted above. The conclusion that the Legislatore did not intend so--we need to be very slow to attribute absurdity to Legislative Acts--can safely be gleaned from the words identified with franchiser found in section 2(12a), and for the good reason explained above. The aforesaid judgment was upheld by the Supreme Court in Civil Petition No. 2776 of 2022.

8. Neither in the impugned orders nor in the submissions before us at the bar was it clarified as to how the O&M services of a coal-fired power plant were marketed by either IPGDL or HPCL. No rights to sell or market electricity -- the product manufactured by HPCL

are given by HPCL to IPGDL under the O&M contract. Nor has the converse been shown as to how any services are sold or marketed by IPGDL which can be identified with HPCL's services. Ingredient No.5 per the Pakistan Television case (supra), namely, the services being identified with the franchiser, is conspicuously missing. If the absurd argument that prevailed with all the three forums below is countenanced, then all bi-partite services contracts between any two companies will become a franchise contract. A Construction contract between an employer and its contractor, a transportation contract between a haulage company and a company wanting to move its goods from one spot to another, a distributorship contract between an importer and the exporter, and a whole gamut of other bi-partite contragts, which do not result in any sale of any goods or services by one of the two parties to third parties branding such goods or services so that they can be identified with the franchiser would all become a franchise, which is obviously neither the letter nor the intent of the definition of franchise under the Act.

9. For this reason, this High Court in the Pakistan Television case (supra) answered the question of law against the department where the department had inferred a franchise solely for the reason that Shalimar Broadcasting Service was a subsidiary of Pakistan Television. Corporation and concluded had that a parent-subsidiary relationship sufficed to bring a franchiser-franchisee relationship also in existence simultaneously and as a necessary consequence thereof. The following excerpt from paragraph 16 of that judgment bears reproduction and is reproduced below: The order-in-original inferred a franchise solely for the reason that SRBC was a subsidiary of PTV, claiming this fact alone to lead to a franchise relationship ... beyond any total of doubt..... These arguments leave one appalled. These are ad bominem arguments, arguing from an unfounded premise of ill-mouve, reaching backwards from a desired result, and resting on the highly fallacious assumption that a parent-subsidiary relationship is invariably also a franchiser franchisee relationship

The learned ATIR fell into further error, just as did the officer passing the order-in-original, that fee charged for technical services is a per se ground to infer a franchise, when neither section 2(12a) so prescribes not is this a business reality.

10. For the aforesaid reasons, we answer question No.2 in the negative, that is, the O&M agreement between IPGDL and HPCL did not create a franchise for the purposes of the Federal Excise Act, 2005. As a consequence, question No.1 becomes irrelevant. MQ/87/Isl. Reference allowed.