Citation(s): 2023 SLD 41 = 2023 PTD 134 = (2024) 129 TAX 131
Appellate Tribunal Inland Revenue, Lahore
I.T.As. Nos. 1510/LB, 1509/LB and 1508/LB of 2020, decided on 10th January,
2022, heard on: 20th December, 2021.
AUTHOR(S): ZAHID SIKANDAR, JUDICIAL MEMBER, MUHAMMAD TAHIR,
ACCOUNTANT MEMBER
NAEEM RAFIQUE BHATTI, GUJRANWALA
VS
THE COMMISSIONER INLAND REVENUE, RTO, GUJRANWALA
Muhammad Ali Awan for Appellant.
Nemo for Respondent.
Law: Income Tax Ordinance, 2001
Section: 2(22A),113,First Schedule
Law: Constitution of Pakistan, 1973
Section: 189,201
Legal Provisions:
Income Tax Ordinance, 2001 (XLIX of 2001)
Section 113: Minimum Tax
Section 2(22A): Definition of Fast Moving Consumer Goods
First Schedule, Division IX, Sr. 2: Special provisions related to the minimum tax for
distributors
Part (a): Minimum Tax for Distributor - Status of Taxpayer
Facts:
The taxpayer claimed to be a distributor and contended that his case fell under Sr. 2(a) of
Division IX of the First Schedule of the Income Tax Ordinance, 2001.
To support this, the taxpayer produced certificates issued by different electronic companies,
which stated he was a distributor.
The question before the Appellate Tribunal was whether the taxpayer's status could be
classified as a distributor under the provisions of the law.
Arguments:
The taxpayer’s counsel argued that the certificates from the companies established his
status as a distributor.
The tax authorities contended that these certificates had no legal weight as the taxpayer
failed to provide additional supporting evidence, such as sales invoices, distribution
agreements, or entries in books of accounts.
Decision:
The Tribunal held that the taxpayer failed to provide substantial documentary evidence to
support the claim of being a distributor.
As there was no agreement on record proving the distribution relationship, the tax
authorities were justified in charging the minimum tax.
The appeal was dismissed.
Part (b): Fast Moving Consumer Goods (FMCG) and Scope of Tax Provisions
Facts:
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The taxpayer was in the business of selling household electrical appliances and claimed that
these goods fell under the category of fast-moving consumer goods (FMCG), as defined
under Section 2(22A) of the Income Tax Ordinance, 2001.
The Tribunal had to determine whether household appliances, such as televisions,
refrigerators, and air conditioners, were considered FMCGs.
Arguments:
The taxpayer argued that these household appliances were part of the FMCG category.
The tax authorities contended that these appliances did not meet the criteria for FMCG
because they were not frequently purchased or of low cost.
Decision:
The Tribunal ruled that household electrical appliances like television, refrigerators, and air
conditioners did not meet the criteria of FMCGs as defined in Section 2(22A).
The reasoning was that these goods are durable in nature and not bought frequently by
consumers. They are higher in cost compared to typical FMCGs.
The 2018 PTD 1582 case was distinguished, as the household appliances were not fast-
moving due to their durability and higher cost.
Appeal dismissed.
Part (c): Definition of Fast Moving Consumer Goods (FMCG)
Decision:
The Tribunal further clarified the definition of FMCGs as per Section 2(22A), emphasizing
that these are goods that are frequently purchased and have a relatively low cost.
Durable goods, even if used daily, do not qualify as FMCGs because they are not purchased
on a regular basis, and they have a higher price point.
Part (d): Scope and Definition of FMCGs
Fast Moving Consumer Goods are products sold quickly at a relatively low cost. These
include products that are used frequently and have a short shelf life (e.g., soft drinks,
confectioneries, dairy, bakery items).
The primary characteristics of FMCGs are that they are purchased frequently, consumed
quickly, and are reasonably priced.
Part (e): Scope of FMCGs for Tax Purposes
The definition in Section 2(22A) excludes durable goods, even if they are in daily use.
Durable goods, such as household electrical appliances, do not qualify as FMCGs for the
purposes of the Income Tax Ordinance.
Part (f): Binding Precedents
Judgments of superior courts (e.g., Supreme Court and High Court) are binding on lower
tribunals and courts.
The Appellate Tribunal, as a subordinate body, must follow the precedents laid down by the
Supreme Court and High Court.
Part (g): Law Applicability in a Tax Year
The law in force during the relevant tax year applies when determining tax liabilities. This is
a key principle in tax matters, where specific provisions applicable in a particular period are
considered when making assessments or decisions.
Conclusion:
Distributor Status: The taxpayer failed to establish his status as a distributor, as the
certificates from companies lacked supporting documentary evidence, leading to the
rejection of his claim and the imposition of minimum tax.
FMCG Scope: Household electrical appliances were ruled out from the FMCG category, as
they are durable, not frequently purchased, and not low-cost. This decision aligned with the
legal definition of FMCGs.
Legal Precedents: The decision emphasized the importance of binding precedents and the
application of existing tax law for the relevant period.
The appeals in both parts were dismissed, and the orders of the tax authorities were
upheld.
ORDER:
ZAHID SIKANDAR, JUDICIAL MEMBER:---.---
These three appeals filed at the behest of the taxpayer are directed against the ORDER:
No.951 dated 26.02.2020, Orders Nos. 981 and 982 dated 09.03.2020 (pertaining to tax
years 2016, 2017 and 2018 respectively) passed by the Commissioner Inland Revenue
(Appeals), Gujranwala. Through the impugned ORDER:s, the CIR(A) dismissed the appeals
of the taxpayer and confirmed the charge of minimum tax @ 1% of turnover for the tax
years 2016 and 2017 and @ 1.25% for the tax year 2018. Since common question of law is
involved therefore we intend to dispose of all the titled appeals through this single ORDER:.
2. Relevant facts in brief are that the taxpayer deals with electronics goods and filed Income
Tax returns by declaring net income of Rs.640,700/-, Rs.655,200/- and Rs.690,500/- for
the tax years 2016, 2017 and 2018 respectively which were deemed as assessment
ORDER:s under section 120 of the Income Tax Ordinance, 2001. Upon scrutiny, the
assessing officer found the returns erroneous so far as prejudicial to the interest of revenue
for the reason of non-payment of minimum tax. Initially, vide show-cause notice dated
09.02.2017 under section 122(9) read with section 122(5A) for the tax year 2016 the
taxpayer was confronted with the charge of minimum tax @ 0.2% but during the
proceedings it was revealed to the assessing officer that the taxpayer deals with retail
business and is liable to pay minimum tax @ 1 % of declared turnover. Hence, the
assessing officer issued a corrigendum of the show-cause notice on 14.03.2019 to the
taxpayer as to the effect that why minimum tax @ 1 % of declared turn over might not be
recovered from the taxpayer. For the tax year 2017 show-cause notice was also sent by the
assessing officer to the taxpayer conveying his intention to amend the assessment by way
of charging minimum tax @ 1 % on the declared turn over. Since the rate of charge of
minimum tax was revised in the year 2017 through Finance Act and the legislature
amended the rate of minimum tax from 1% to 1.25% therefore a show-cause notice was
issued by the Addl. CIR to the taxpayer for the charge of minimum tax @ 1.25% for the tax
year 2018. In response to the said show-cause notices, the taxpayer Filed written replies
contending to be a distributor of Haier Pakistan (Pvt.) Ltd., Dawlance Electronics (Pvt.) Ltd.
and PEL marketing (Pvt.) Ltd. and claimed entitlement of 80% reduction in minimum tax
liability under Sr.No.2(a) of Division IX of Part I of 1st Schedule of the ITO. The claim of the
taxpayer of a distributor was not well supported by any documentary evidence, hence being
dissatisfied the Addl. CIR observed that the taxpayer is not a distributor of FMCG rather a
retailer of electronic appliances. Therefore, the assessing officer finalized the amendment
proceedings by way of charging minimum tax @ 1% of the declared turn over for the tax
years 2016 and 2017 amounting to Rs. 768,759/-, Rs. 733,660/- and @ 1.25% for the tax
year 2018 to the tune of Rs. 1,076,415.
3. Being aggrieved, the taxpayer filed three appeals under’ section 127 before the learned
CIR (Appeals) against the amended assessment ORDER:s passed by the Addl. CIR. The
learned commissioner (Appeals), after hearing the parties, upheld the treatment given to
the taxpayer in the amended assessment ORDER:s. Hence, these second appeals have been
Filed by the taxpayer against the ORDER:s passed by the CIR(A).
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4. Mr. Muhammad Ali Awan, advocate appeared on behalf of the appellant taxpayer and
submitted that the appellant is a distributor of Fast Moving Consumer Goods (FMCG) and
the contention of the appellant is well supported by the documentary evidence hence
entitled for reduced rate of minimum tax and the CIR(A) as well as the assessing officer
erred in law by charging the minimum tax @ 1% and @ 1.25%. In ORDER: to strengthen
the arguments, the learned counsel placed reliance on the judgment of the Hon’ble Lahore
High Court in a case titled as CIR v. M/s Haier Pakistan (Pvt.) Ltd. reported in 2018 PTD
1582. On the other hand no one appeared on behalf of the respondent department.
Therefore, this case is decided ex-parte on merits and on the basis of available record and
arguments advanced by the learned counsel for the appellant.
5. The issue involved in the instant appeals is whether the status of the appellant taxpayer
is as of distributor and whether the household electrical appliances fall in the category of
Fast Moving Consumer Goods (FMCG). The appellant contends to be the distributor of FMCG
and claims reduction in the charging of minimum tax. Whereas both the lower forums below
have rejected the claim of the taxpayer as the taxpayer failed to establish his claim of
distributor through cogent documentary evidence. There exists no dispute with regards to
the declared turn over for the said tax years. Division IX of Part I of 1st Schedule of the ITO
provides the table of charging of minimum tax at different rates on different entities. The
taxpayer claims to fall in Sr.No. 2(a) as a distributor dealing in FMCG. To claim reduction in
minimum tax under this provision, the assesse has to establish the status of a distributor
dealing in Fast Moving Consumer Goods. The learned counsel for the appellant provided
certificates issued by the companies PEL marketing (Pvt.) Ltd., Dawlance Electronics (Pvt.)
Ltd. and Haier Pakistan (Pvt.) Ltd. to prove the claim as of distributor. We are afraid that
these certificates issued on a letter pad have no sanctity in the eye of law in the absence of
any supporting evidence i.e sales invoices, entries in books of accounts, distribution
agreement etc. The assesse has to establish the relationship with the company, through
transactions between company and the taxpayer and transactions between
taxpayer/assesse with the retailers. Even no agreement has been placed I on record by the
taxpayer with regards to the relationship of a distributor I between the companies and the
taxpayer. Without bringing on record or any material pertaining to accounts of business
reflecting the nature of transactions, margin as a distributor, relationship as distributor with
the company for such and such period, the claim of the appellant taxpayer being a
distributor cannot be given any weight. Even from the perusal of the certificates provided
by the learned counsel, it transpires that the certificate issued by PEL Marketing (Pvt.) Ltd.
certifies the relationship with the appellant as of distributor/dealer with the appellant. It is
unclear from the certificate whether the appellant is a distributor or dealer.
Whereas the certificates issued by the other two companies confirm the relationship with
the appellant taxpayer as of dealer and not of distributor. These certificates nowhere
suggest the relationship between the taxpayer and the companies as of distributor. Even if
such certificates confirm the status as of distributor still in the absence of any supporting
documentary evidence in shape of accounting entries, books of accounts, sales invoices,
agreement of distribution or any other document reflecting the nature of business between
the company and the taxpayer, cannot be accepted as a confirmed and cogent piece of
evidence to substantiate the claim of the taxpayer as of distributor. Further, the perusal of
the table in Division IX of part I of Schedule I of the ITO reflects that both the words
‘dealer’ and ‘distributor’ are differently used for different entities hence not interchangeable.
Had the legislature intended to treat both the dealers and the distributors as of similar
character, it would not have categorized the dealers and distributors in different column%
for different entities. Therefore, the words ‘dealers’ and ‘distributors’ cannot be
interchanged for the purpose of. claiming reduced rate of charge in minimum tax given in
the table Division IX of Part I of 1st Schedule of the ITO. We have noted that the certificates
provided by the taxpayer certifies the status of the taxpayer as of authorized dealer and not
of distributor, therefore the initial claim of the taxpayer having the status of distributor is
not proved hence, rejected.
6. The other question involved in the instant appeals is whether the household electrical
appliances like Television, Refrigerator, Air- conditioner etc fall within the definition of Fast
Moving Consumer Goods (FMCG). Admittedly the appellant taxpayer deals with these
household electrical appliances. Fast Moving Consumer Goods is defined in section 2(22A)
of the Income Tax Ordinance, 2001. The said definition was inserted in the ITO through
Finance Act, 2015. For the sake of ready reference, section 2(22A) is reproduced below:
“Fast Moving Consumer Goods” means consumer goods which are supplied in retail
marketing as per daily demand of a consumer [excluding durable goods].
7. From the definition of the FMCG it reflects that fast moving consumer goods are those
goods which are in -the daily usage of a consumer. Further reading of the definition
stipulates that it ousts those goods from the definition of FMCG which are durable in nature.
It means that despite goods of daily demand and usage if are durable in character the same
cannot be treated as Fast Moving Consumer Goods under the Income Tax Ordinance. The
following are the main characteristics Qf Fast Moving Consumer goods according to product
management in India.
gt; From the consumer perspective:
(i) Frequent purchase.
(ii) Low involvement (little or no effort to choose the item-products with strong brand
loyalty are exceptions to this rule) and
(iii) Low price
gt; From the marketer’s angle:
(i) High Volumes
(ii) Low contribution margins
(iii) Extensive distribution networks
(iv) High stock turn over.
According to Investopedia.com Fast moving consumer goods are products that sell quickly
at relatively low cost. These goods are also called consumer packaged goods. FMCGs have a
short shelf life because of high consumer demand (e.g soft drinks and confectionaries) or
because they are perishable (e.g meat, dairy products or bakery items etc). These goods
are purchase frequently, are consumed rapidly, are priced low and are sold in large
quantities.
8. The bare reading of the definition of fast moving consumer goods given in the Income
Tax Ordinance along with definitions being used in the trading world clearly stipulates that
these are those goods which are largely used in daily routine, having a high demand and
relatively a low cost. Section 2(22A) further ousts the durable goods even if they fall in the
definition of FMCG for the purpose of income tax provisions. Now in the context of the
instant appeals, we are of the considered opinion that household electrical appliances e.g
Television, Refrigerator, Air conditioners etc do not fall in the definition of fast moving
consumer goods for the reason that neither they are frequently purchased by the consumer
nor their costs are relatively low. Though these appliances are used in almost every house
but they are also durable in nature as the consumer does not buy these items on frequent
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basis.
9. The reliance placed by the learned counsel for the taxpayer on the judgment cited in
2018 PTD 1582 is incorrect as the said judgment is not applicable to the present case. It is
stated with utmost respect that there is no second opinion about the fact that judgments of
superior courts are binding to the subordinate tribunals/courts and this tribunal being a
subordinate functionary is bound to follow the dictums laid down by the Hon’ble High Courts
as well as the Hon’ble Supreme Court of Pakistan. In our considered opinion the matter in
hand is distinguishable from the case referred by the learned counsel. The case of CIR v.
M/s. Haier Pakistan pertains to the tax year 2012. The Hon’ble apex court interpreted the
term ‘consumer goods’ given in clause 8 in Part III of Second Schedule of ITO which reads
as under:
Part III
Reduction in Tax liability
Income or classes of income, or classes of person, enumerated below, shall be allowed
reduction in tax liability to the extent and subject to such conditions as are specified
hereunder:
(8) For the distributors of pharmaceutical products, fertilizers, Consumer goods including
fast moving consumer goods, the rate of minimum tax on the amount representing their
annual turnover under section 113 shall be reduced by eighty percent.
10. The clause (8) reproduced above was inserted in Part III of Second Schedule in
November, 2010 through SRO 1086(I)/2010 and was omitted by Finance Act, 2014, The
Hon’ble High Court observed that the phrase ‘fast moving consumer goods’ is to be read in
the term of, ‘Consumer goods’ as it does not matter whether electrical appliances are fast
moving consumer goods or not because word ‘including’ is used right after the term
consumer goods and before the phrase ‘fast moving consumer goods’ therefore the syntax
of this clause shows that the term consumer goods is inclusive of fast moving consumer
goods. Definition of Section 2(22A) inserted through Finance Act, 2015 was also discussed
by the Hon’ble Court but since the matter pertained to the tax year 2012 therefore the said
definition was not considered applicable in that case. The Hon’ble Court nowhere observed
that the electrical appliances are Fast Moving Consumer Goods. Even the question framed in
the case of Haier Pakistan (supra) and decided by the Hon’ble High Court was:
“Whether on the facts and circumstances of the case, the household electronic goods can be
termed as consumer goods for the purpose of clause 8 of Part III of Second Schedule while
actual nature of the goods is consumer durables?”
The answer to this question was given in affirmative by the Hon’ble Court and the electrical
appliances were observed as consumer goods for the purpose of clause 8 of Part III of 2nd
Schedule.
These appeals pertain to tax years 2016, 2017 and 2018. The provision given in the clause
(8) of Part III of Second Schedule which made basis of the decision of case M/s. Haier
Pakistan (supra) has been omitted in 2014 and the existing definition of ‘fast moving
consumer goods’ has been provided independently in section 2(22A) through Finance Act,
2015 for the purpose of charging tax. It is well recognized principle of taxation laws that law
existing in a particular tax year or tax period is applicable for the purpose of determining
tax liability. Reliance is placed on a judgment in a case titled as CIR v. Three Star Rice
Factory cited in 2021 PTD 1. For the reasons stated above the case of M/s Haier Pakistan
referred by the learned counsel for the taxpayer is not applicable in the present appeals.
11. There is also a definition of ‘consumer goods’ which was inserted in Section 2(13AA)
presently re-numbered at Section 2(13AB).
It defines goods that are consumed by the end consumer rather than used in the production
of another good. This definition was also inserted in the ITO through Finance Act, 2015
along with a separate definition of fast moving consumer goods. Prior to that the term
consumer goods was to be considered inclusive and the phrase fast moving consumer goods
was to be read in it as per clause 8 of Part III of Second Schedule of ITO. Therefore, the
Hon’ble High Court in the case referred supra observed that it does not matter whether the
electrical appliances are FMCGs or not as the same are included in the term ‘consumer
goods’. In the year 2015, the legislature intentionally categorized these two different
products for the purpose of charging of tax. Now at best, considering all the definitions of
fast moving consumer goods, characteristics of FMCG as understood by the corporate world,
and definition of consumer goods electrical appliances can be taken as consumer goods as
already held by the Hon’ble High Court. Hence, we are not fortified with the contentions
raised by the learned AR that the household electrical appliances are covered under the
definition of Fast Moving Consumer Goods.
12. As a consequence, the claim of the taxpayer of entitlement of reduced rate given in
serial No.2 sub-clause (a) of the table given in Division IX, Part I of 1st schedule of the ITO
is not correct as neither he is a distributor nor he deals with fast moving consumer goods.
13. The learned counsel also submitted that the department has accepted similar stance of
the taxpayer in the subsequent tax year 2019 wherein the taxpayer was given the benefit of
reduced rate in charging minimum tax. Without commenting on the legal correctness of the
ORDER: we hold that the said ORDER: is not binding on this tribunal and we do not agree
with the decision.
14. The appellant taxpayer has failed to establish the status as of a distributor dealing in
FMCGs with any documentary evidence, therefore, the assessing officer rightly charged the
minimum tax @ 1% for the tax years 2016 and 2017 and @ 1.25% for the tax year 2018.
15. Order No.951 dated 26.02.2020, Orders Nos. 981 and 982 dated 09.03.2020
(pertaining to tax years 2016, 2017 and 2018 respectively) passed by the CIR(A) are
neither arbitrary nor fanciful and based on valid reasons therefore the same do not call for
any interference by this bench and are accordingly upheld.
16. With the above narrated reasons, these titled appeals filed at the behest of the taxpayer
are dismissed being devoid of any merit.
