COCA COLA PAKISTAN LTD. vs COMMISSIONER INLAND REVENUE, LARGE TAXPAYERS OFFICE, LAHORE

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COCA COLA PAKISTAN LTD. VS COMMISSIONER INLAND REVENUE, LARGE TAXPAYERS OFFICE, LAHORE. Ss. 67, 120, 122(5), 148 & 237---Income Tax Rules, 2002, R. 13---Income tax---Manufacturer deriving income from locally manufactured products and imported finished goods---Imported goods subjected to final tax at import stage---Allocation or apportionment of expenditures between presumptive and non-presumptive income---Presumptive tax regime income on importation of goods---Re-apportionment of expenses by applying Rule 13 of the Income Tax Rules, 2002---Legality---Briefly, for tax year 2003, the petitioner taxpayer derived income from two sources: locally manufactured beverages chargeable under the normal tax regime and imported finished beverages subjected to final tax at import stage under Section 148 of the Income Tax Ordinance, 2001. The taxpayer filed its return under Section 120, which became a deemed assessment, wherein it apportioned common expenditures between the two income streams on the basis of gross profit ratio. The Commissioner Inland Revenue amended the deemed assessment under Section 122 by reallocating expenditures between presumptive and non-presumptive income through application of Rule 13 of the Income Tax Rules, 2002, using a sales-based formula. The departmental appeal failed, but the Appellate Tribunal set aside the amendment, whereafter the High Court, in a tax reference, reversed the Tribunal's decision. The taxpayer then sought leave to appeal before the Supreme Court against the High Court's judgment. The pivotal question of law for consideration was as to whether the Appellate Tribunal was justified to hold that Rule 13 of the Income Tax Rules, 2002 was not mandatory for purpose of apportionment of expenses under Section 67 of the 2001 Ordinance. Held: As long as any reasonable basis was used for the proration of expenditures, the basis applied by the taxpayer could not be defeated or denied simply for the reason that applying Rule 13 of the Income Tax Rules, 2002 would have resulted in a larger or enhanced tax liability. Or, to invert that observation, it was impermissible to conclude that since the non-application of Rule 13, and the reasonable basis actually adopted by the taxpayer in its stead, resulted in a smaller tax burden that, in terms of Section 122(5), amounted to income chargeable to tax escaping assessment or led to the total income being under-assessed. That would be to completely misconstrue and misapply both that provision and Section 67(1). The point, for present purposes, was reinforced by sub-rule (2) which provided that any expenditure incurred for a particular class or classes of income was to be regarded as so allocated. From this, it was clear that the submission made on behalf of the petitioner was correct that the manufacturing and other such expenses incurred for the local production of beverages had to be allocated solely to the non-presumptive tax regime income and had nothing to do with the presumptive tax regime income. For such expenditure the question of proration did not arise. The order amending the deemed assessment showed that the department, while applying the formula laid down in sub-rule (3), had taken total admissible expenses into account, which was incorrect in the facts and circumstances of the case. The nature of the exercise required, i.e., allocation between presumptive and non-presumptive income, and keeping in mind the relevant factors as applicable, i.e., the relative size and nature of the activities, local manufacture versus import to which the expenditure related, the basis actually adopted was a reasonable one. That sufficed for purposes of subsection (1) of Section 67. It followed that the approach taken by the department and upheld by the High Court was not sustainable. The leave petition was converted into an appeal and the question posed was answered in the affirmative in the circumstances.

COCA COLA PAKISTAN LTD. vs COMMISSIONER INLAND REVENUE, LARGE TAXPAYERS OFFICE, LAHORE — 2026 PTD 669 SUPREME-COURT

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