2010 PLP (Trib (PTD)

Above captioned appeal has been filed by the department against the impugned order dated 12-11-2009 passed by the learned Commissioner Inland Revenue (Appeals-I), Karachi on the following sole ground: "(2) That the learned Commissioner (Appeals-I) Inland Revenue was not justified to annul the order under sections 161/205 of the Income Tax Ordinance 2001."

2. Brief facts of the case are that the taxpayer is a Private Limited Company engaged in the manufacturing of pharmaceutical products. Taxpayer being a prescribed person was obliged to withhold and deposit tax whenever and wherever warranted under the law. Taxation Officer during the monitoring proceedings observed that under the head advertisement and sales promotion expenses at Rs.23.025 million the taxpayer claimed Rs.18.455 million on account of "expenses recorded to settle the distributor's claim for free goods being issued to distributors on account of various sales promotion schemes during the year, 2007-2008. Taxation Officer confronted the taxpayer that this expenditure is basically and specifically incurred on account of sales promotion and taxpayer was legally bound to deduct tax at Rs.3.691 million under section 156 of the Income Tax Ordinance, 2001, which failed to do so. Therefore, through notice dated 4-2-2009 taxpayer was required to explain why tax at Rs.3.961 million may not be recovered by treating "a taxpayer in default" followed by charge of Additional tax at Rs.0.422 million under section 205 of the Income Tax Ordinance, 2001. In response vide letter dated 7-4-2010 it was explained that issuance of free goods of Distributors for sale promotion does not attract withholding A under section 156(2) as these do not fall under the ambit of prizes. Taxation Officer found the explanation not tenable and proceeded to charge tax' at the rate of 20% by treating such free goods issued to the distributors by the taxpayer under sales promotion scheme being hit by mischief of section 156 of the Income Tax Ordinance, 2001 and charged additional tax under section 205 of the Income Tax Ordinance, 2001 thereon. Taxpayer being aggrieved with the treatment meted out by the Taxation Officer, filed appeal before the First Appellate, Authority i.e. learned CIR(A), who vide impugned order annulled the order of Taxation Officer. Department dissatisfied with the order of learned CIR(A), preferred the appeal before this Tribunal.

3. Mr. Ayaz Mughal, DR, learned representative of the department contended that the learned Commissioner (Appeals-I) Inland Revenue did not justify in annulling the order passed by Taxation Officer under sections 161/205 of the Income Tax Ordinance, 2001.

4. On the other hand. Mr. Amjad Javed Hashmi, Advocate learned counsel for the taxpayer supported the order passed by the learned Commissioner Inland Revenue (Appeals-I), Karachi.

5. The learned CIR (A) while adjudicating upon the case has given his verdict as under:-- "...First if we look at the nature of transaction carried on as it appears and as forward by the appellant, it is apparent that an incentive scheme was launched by the appellant to its country wide distributors. The appellant's assertion is that the activity is consistent with past practice, which is well established in the pharmaceutical industry of the country: The extra units of medicine to the distributors are part of the quarterly bonus scheme, aiming to help them to achieve certain sales targets fixed by the marketing department on the completion of a quarter. The distributors getting free goods have to pass them to the retailers as per letter of the marketing department issued to the distributors wherein terms and conditions of the scheme have been provided. In case of failure, the company would take punitive action against the distributors at the end of each quarter, the general ledger account of the successful distributor is credited for an amount equal to the price of goods. This bonus scheme is a routine commercial activity which cannot be strained to mean as an "offering a prize". The Taxation Officer on the other hand contested that the appellant has admitted that it has offered a bonus scheme for giving "free goods" to distributors... In order to thrash out the issue in hand it would be pertinent to go through section 156 of the Income Tax Ordinance, 2001 for better perception and immediate reference as follows:--

156. Prize and winnings. (1) Every person paying [prize on] on prize bond, or winnings from a raffle, lottery, (prize on. winning a quiz, prize offered by companies for promotion of sale,) 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 sub-section (2) shall be final tax on the income from prizes or winnings referred to in the said subsections.] 'From examination of the above provision of law it transpires that the legislature has inserted the words "prize on winning a quiz, prize offered by companies for promotion of sales" in the statute by Finance Act, 2003 with the intention to tax such transactions falling under the above heads which has so far escaped taxation. The action of the Taxation Officer applying the said provision to the bonus scheme launched by the appellant in shape of distribution of free units of medicine is to be judged The word prize has not been defined in the statute 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 order 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, winnings quiz, offered by companies for promotion of sales and cross words puzzle, which are all consumer/public at large oriented, but in the appellants case the offering of free units of medicines is only confined to its distributors, which seems to be trade oriented. Thus by its nature this bonus scheme of the appellant will not qualify for inclusion in the definition of the word "prize" as envisaged in the section 156 of the Ordinance. `To further dilate on the issue it would be material to know as to what is "sales promotion", whether the incentive offered by the appellant to its distributor fall in the definition of sales promotion and if so then in which category.' `Sales promotion as understood means promotional methods using special short-term techniques to persuade members of a target market to respond or undertake certain activity. As a reward, marketers' offer something of value to those responding generally in the form of lower cost of ownership for a purchase or the inclusion of additional value-added material (e.g. something more for the same price).' `Sales promotions are used by a wide range of organizations in both the consumer and business markets, is a tool used to achieve most of the five major promotional objectives ... Considering the above exposition of "sale promotion" it can safely be deduced that the issue in hand .falls under one of the, classification of sales promotion called "Trade Promotion" and not under "consumer promotion". One of the concepts of trade promotion is a "free goods allowance", offering of free, goods, which concurs with the contentions of the appellant and does not seem to equate with the concept of meaning of prize as used in section 156 of the Ordinance. Meaning of the word "prize" used in section 156(1) has to be considered in conjunction with the phrase "offered by companies on sales promotion". The appellant is of. the view that word 'prize' whether used in the section 156 must have consistency of meaning and similarity of colour when viewed on the well-established rule of construction that meaning of a word used in a statute is known by the company its keeps i.e. the doctrine of Noscitur a Sociis 'I am inclined to agree with the appellant's assertion that essence of five situations used in the said section comprise of an offering to the public at large. In the circumstances the essentials of section 156 need to be examined in order to prove or disapprove the comments of the Taxation Officer. For the matter there cannot be 'a better explanation as provided in an Indian Case reported as (2004) 141 Taxman 615 (Kar.) as under:-- "The essential elements that go to constitute a lottery are: (1) a prize or some advantage in the nature of a prize, (2) distribution thereof by chance, and (3) consideration paid or promised for purchasing the chance. Thus, unless all the three elements are satisfied, the prize scheme cannot be considered as a lottery. A price must be charged for participating in the draw. The chance of a person getting the prize could not the treated as part of the bargain unless independent consideration was there with respect to the prize awarded." "Thus it is held that the offering of free units of medicine to its distributors does not fall that the offering of free units of medicine to its distributors does not fall within the definition of prize as envisaged in section 156 of the Income Tax Ordinance, 2001. This view is also strengthened by an Indian case law reported as 78 ITR 2010 of Calcutta High Court CIT v. Santosh Agencies in which it is held as under:-- "Sales promotion expenses connote activity akin to advertisement or publicity. Rewarding the selling agents with special discount or pleasure trips on the basis of performance cannot be said to be sales promotion pertaining to the same genus as advertisement and publicity. By these rewards given to the selling agents the assessee cannot be said to have taken steps to draw attention of the consumers. The entire effect of the expenditure is consumer-neutral, it may have an indirect effect on the market in the sense this will instill in the selling agents a greater fervour pushing up sales but selling expenses incurred in the ordinary course of business and were not covered by the expression "sales promotion expenses" as mentioned in section 37(3A) read with section 37(3B) of the Act and could not be disallowed. (Emphasis is our) In the light of the principle evolved in the above quoted decision and the foregoing discussion, it emerges that the activity carried out by the appellant is "Consumer Neutral" as the scheme is not open to general public. The said scheme is not stimulating public at large or developing any kind ingredients relatable to prize or winning, on bonds, raffle lottery or quiz. Although in the scheme offered by the appellant the ultimate beneficiary may be the consumer, but at no stage of the activity he seems to have participated. The activity carried out by the appellant is not a short term value proposition rather the targets are set by the appellant's company for a quarter and continue for next quarter, thus it is contrary to the essence for sales promotion that it should be a short terms technique. Further for participation in the scheme launched by the appellant, the distributors do not require to be eligible by doing some act to receive the value proposition. The both hallmarks of timing constraint and activity requirement are missing, therefore it can be safely deduced that the scheme launched cannot be said to include the connotation of sales promotion as used in section 156 of the Ordinance, instead it is fully entitled to and fulfills the conditions of "trade sales promotion" as discussed. 'The outcome of the whole discussion is that the bonus scheme launched by the appellant is to be clearly differentiated from the category of prize on sales promotion as intended in section 156 of the Ordinance; therefore, invocation of provision of section 156 does not arise. `The doctrine of Noscitur a Sociis as referred to by the appellant is apt and is strengthened by a decision of the S.C. (Pak.) reported as PLD 1969 SC 57 holding that:-- "There are authorities for the proposition that "when two or more words which are susceptible of analogous meaning coupled together noscumture as sociis they are understood to be used in their cogent sense." "They take, as it were their colour from each other that is, the more general is restricted to a sense analogous to the less general." 'Moreover, when there is doubt as to the meaning of words giving in the statute then it was held in a case reported as 1965 PTD 540 that : "Words of doubtful meaning to be interpreted in manner which best harmonious with subject of statute and object of Legislature Court to arrive at exact conception of aim, scope and object of "whole Act" The above referred case laws squarely apply to the circumstances of the appellant and the interpretation of the provisions of section 156 by the Taxation Officer needed to be based on the said principles of interpretation of statutes. In the light of the conclusion drawn in the foregoing discussion the action of the Taxation Officer by treating the appellant " a taxpayer in default" under section 161 of the Income Tax Ordinance, 2001 and consequently charging of additional tax under section 205 thereon is not sustainable both on legal well as on factual plains. The impugned order passed under sections 161/205 of the Income Tax Ordinance, 2001 is, therefore, Annulled"

6. The Learned AR has come up with same arguments and case laws as placed before the learned CIR(A). On the other hand learned DR supported the order of the Department.

7. We have heard the arguments of both the AR and DR and gone through the relevant record. In our candid opinion the learned CIR(A) has been swayed away by the irrelevant and point less arguments of the AR of the taxpayer. He has overstretched in finding different definitions of the words used in the statute under consideration viz. section 156 of the Income Tax Ordinance, 2001. The golden rule of interpretation of taxation statute has very been clearly laid by the honourable Superior Courts in their various decisions such as citations i.e. PLD 2000 SC 111 and (2003) 87 Tax (SC Pak.) (sic) notwithstanding a number of similar decisions by privy counsel and several Superior Courts. Such a mention of interpretation of statute emanates from the following decision:-- 2002 PTD 1 (SC Pak.) "It may be noted that according to the settled principle of law that a fiscal statute 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 the interpreted liberally in order to make out a case in favour of an assessee who has failed to pay the tax."

8. In order to be judicious, we have to look into the plain reading of section 156 of the Income Tax Ordinance, 2001 and the words used therein. Two important words are the "prize" and "sales promotion". If we look into the definition of the word prize the same has been used for different situations. We have to see the direct relevancy of the word "prize" with that of "sales promotion" without adding any other adjective or suffix or prefix to any of these words. Reverting back to the definition, the dictionary meaning does not favour the contention of the AR for instance: the Chambers Dictionary's defines the word "prize" as follows: "Prizel (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 or, 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 (obs); (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 prize, esp an academic prize; prize-winner [A differentiated form of price and praise, from Ofr pris (n) and priser (vb) from L pretium prize) 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 the prize Court a Court for judging regarding prizes made on 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, feminie pa p f paraehendere to seize]

9. Interpretation of learned CIR(A) that a prize can be won by chance is fallacious as it is not conforming with the facts of the case under consideration. Factually the taxpayer company has given free units to its distributors at the time of achieving the requisite target by the distributors which the department has rightly taken as prize on sales promotion. Here again giving a different colour to any event which squarely comes within the ambit of section 156 of the Income Tax Ordinance, 2001 would not help the case of the taxpayer. We find ourselves in disagreement to the contention of the learned CIR(A) the same is therefore rejected.

10. Again the learned CIR (A) referred to a case law reported as (2004) 141 Taxman 615 (Kar) an Indian case law, does not find any place in the whole affair of section 156 of the Income Tax Ordinance, 2001 as the said case law explicitly mentions the elements of lottery, therefore, the same has wrongly been overstretched in the context of word "prize" used in aforementioned section 156 of the Income Tax Ordinance, 2001. The, learned CIR(A) has again miserably failed to convince us on this interpretation of the word prize. We, therefore, reject the same.

11. Perusal of the section 156 of the Income Tax Ordinance, 2001; shows that the words 'prize' and 'sales promotion' have never been restricted to either general public at large or distributors. Discussion on the case laws submitted by the AR before this Bench finds its place in the order of learned CIR(A). These case laws referred to are Indian Income laws and are distinguishable as discussed above.

12. The learned CIR(A) has again relied upon the scheme to be open to general public at large. Here again we find that this discussion is linked with allowability of expenses under the Indian Income Tax Act and is irrelevant for the purpose of section 156 of the Income Tax Ordinance, 2001.

13. The learned CIR(A) has referred to decision reported as 78 ITR 2010 of Calcutta High Court CIT v. Santosh Agencies. This case law relates to allowability of sales promotion expenses in the context of Indian law. We are afraid that to assign meaning of sales promotion expenses under the Income Tax law of India would be out of context for the purpose of Income Tax Law of Pakistan and that too under different heading whereas the Indian law refers to sales promotion expenses the word used in Pakistan Law is for promotion of sales. It is without additional word "expenses". To us this changes the entire complexion of the case under consideration. Perusal of the learned CTR(A) order shows that he has referred to a concept of consumer neutrality scheme. We find that this situation is absolutely irrelevant for the purposes of section 156 of the Income Tax Ordinance, 2001. Our contention is supported by the fact that since the words used in the law is for "sales promotion" and if this event of "sales promotion" is established then any further interpretation would render the whole exercise in futility.

14. In a nutshell, we conclude that the learned CIR(A) has overstepped beyond the boundaries of the phrase used by the legislators in section 156 of the Income Tax Ordinance. 2001 in establishing that the taxpayer's case doest not fall under ambit of this section. We believe that for the explicit reasons discussed above, the word prize covers the free units given by the taxpayer company to the distributors. Similarly the word sales promotion has to be construed in the scheme of things carried out by the taxpayer company, bringing the same within the four walls of the provisions of section 156 of the Income Tax Ordinance, 2001. In the light of various judgments of Superior Courts the Golden Rule of interpretation of statute has to be followed in letter and spirit. We, therefore, hereby annul the impugned order of the learned CIR(A) and allow the appeal filed by the department and restore the order of the Taxation Officer.

15. The appeal succeeds as above. H.B.T./152/Tax(Trib.) Appeal allowed.