EMCO INDUSTRIES LIMITED

TAX YEAR 2008

WRITTEN ARGUMENTS

01. That the order dated June 25, 2013 passed by the learned Deputy Commissioner inland Revenue (‘DCIR’), Audit 03, Zone 1, Large Taxpayers Unit, Lahore, under section 124/129 of the Income Tax Ordinance, 2001 (‘Ordinance’) is bad in law and against the facts of the case.

02. That the learned DCIR has erred in making addition amounting to Rs. 4,177,000/- under section 34 (5A) / 151 / 21 (c) of the Ordinance.

In this connection, the appellant wishes to submit that during the year under appeal, the appellant company had adjusted the liability on account of markup payable to Imperial Electric Company (Private) Limited (‘IEL’) against the amount receivable from the same company on account of property rentals, which in the opinion of the learned DCIR is hit by mischief of section 151 and he has, therefore, held that the taxpayer as taxpayer in default.

In this respect, the appellant wishes to submit here:

i) That the DCIR has invoked the provision of section 151 in spite of the fact that a plain reading of the section shows that the case of the present taxpayer is not hit by any of sub clause of section 151. The only sub clause wherein companies have been made responsible to deduct tax is clause (d) of section 151 which is regarding payments made in respect of profits of any bond, certificate, debenture, security or instrument of any kind; the relevant section reads as under:

151. Profit on debt.-

(1) Where -

(d) a banking company, a financial institution, a company referred to in sub-clauses (i) and (ii) of clause (b) of sub-section (2) of section 80, or a finance society pays any profit on any bond, certificate, debenture, security or instrument of any kind (other than a loan agreement between a borrower and a banking company or a development finance institution) to any person other than financial institution,

the payer of the profit shall deduct tax at the rate specified in Division I of Part III of the First Schedule from the gross amount of the yield or profit paid as reduced by the amount of Zakat, if any, paid by the recipient under the Zakat and Ushr Ordinance, 1980 (XVII of 1980), at the time the profit is paid to the recipient.

But in case of the appellant, the DCIR has failed to point out as to which of the above said five items the case of the present taxpayer was involved on which profit was paid by the taxpayer attracting clause (d) of section 151(1).

The appellant company wishes to refer here a case reported at 105 TAX 494, wherein on an identical issue the Honorable Appellate Tribunal Inland Revenue, Lahore has annulled the orders passed by the assessing officer u/s 161 of the Ordinance; Copy of the judgment is being enclosed as Annex A.

ii) it had adjusted the liability on account of markup payable to Imperial Electric Company (Private) Limited (‘IEL’) against the amount receivable from the same company on account of property rentals; and since Messrs. IEL (currently being assessed vide NTN 0683648-8 in Zone III, Large Taxpayers Unit, Lahore) has itself paid due tax on the markup as a part of its taxable income for the relevant year, no addition is warranted in terms of section 21 (c) of the Ordinance. Reliance is placed on a case reported at 99 TAX 48 (HC), wherein the apex court has held that

It emanates from the above discussion that where the recipient has discharged his liability, after inclusion of the payment from the assessee in default in the total income and such amounts has already suffered the incidence of tax, the payer cannot be held to be an assessee in default and the Department cannot demand further tax from the payer by recourse of the provisions contained in section 52 of the Income Tax Ordinance, 1979.

Copies of the above-referred judgment and return of Messrs. IEL are being submitted as Annex ‘B’ and ‘C’, respectively.

It is, therefore, prayed that the addition of Rs. 4,177,000/- made by the learned DCIR under section 34 (5A)/151/21 (c) of the Ordinance may please be deleted and the declared version of the appellant in this respect may please be accepted.

03. That the DCIR has erred in disallowing the claim for discount amounting to Rs. 48,663,362/- under section 21 (c) of the Ordinance.

In this connection, before putting forward arguments on issue, it will be appropriate to briefly discuss the history of the case; the original assessment was finalized vide order dated 31.05.2010, passed under section 122 (1) / 122 (5) of the Ordinance wherein the learned DCIR, by invoking provisions of section 109 of the Ordinance, had re-characterized the transaction and assessed it as the commission. The appellant company had preferred appeal before the honorable Commission Inland Revenue (Appeals 1), Lahore who vide appellate order dated 12.07.2011 had remanded back the issue with the following remarks:

“One thing is also very important in this connection is that a commission agent acts on behalf of the principal in dealing with the third person (section 120 of the Contract Act, 1872). Where there is a relationship of a principal and agent, the agent is supposed to act in accordance with the conditions laid down by the principal. Here the contention of the AR is that the dealers are free to sell the product at any price they like and they are not bound by any preconditions.

What is conspicuous in this case is the absence of any evidence on this score on record. After giving my anxious consideration of the facts of this case and the rules that emerge from the reading of the case law, as mentioned supra, I think one thing that should decide the issue is the offer of discount / commission to the number of persons. I mean, in case of discount it is everybody. For instance, one may see the offer of discount on the signboards / banners displayed on pharmacies, CNG stations and well known departments stores offering summer / winter sale. This offer, needless to say, is for everybody. Whereas, in case of commission it is only for chosen few who are willing to abide by the conditions of distribution.

Therefore, this is remanded to the ACIR concerned to examine this very vital factor (the litmus test): where any conditions/ qualifications have been laid down by the appellant for the dealer or not? Needless to say, if there are any such like conditions

this will be a case of payment of ‘commission’; otherwise, it will not be a ‘commission;

In addition, the ACIR will also examine the tax profile of the dealer to see in what manner they declared their accounts and tax returns.”

In the reassessment proceedings, the learned DCIR has repeated the action of its predecessor and has assessed the discount expense as commission.

The appellant wishes to submit that the amount of Rs. 48,663,362/- is, in fact, a discount and cannot be considered as commission on any pretext. The appellant feels quite relevant to first briefly explain here its sales mechanism. The appellate company does not sell its products directly to the retailers or ultimate users, except the sales, which are made at the company’s own outlets. The company sells its products directly to dealers either on credit or cash basis, and thereafter, the dealers directly sell these goods either to retailers or the end consumers. In order to increase its sales and to encourage the dealers to make early payments against credit sales, the appellant company allows to dealers a discount of 2 % - 9 %, on sales made to them, depending on the volume of sales vis-à-vis recovery / collection within the specified period of time. At the end of every month sales made are judged in line with the slabs of “Discount Policy” and discount, according to the sales made to dealers, is credited to each party’s account through Credit Note.

In this background, the appellant wishes to submit that under the generally understood business parlance, any particular amount is regards as ‘Commission’ where the arrangements are between three parties where the third party is paid a ‘commission’ in respect of sale / purchase between two parties. At its root, the differential amount in dealings between the two parties is always regarded as a ‘discount’ because a buyer of goods cannot be allowed a commission on purchases directly made by him. The foremost examples of ‘commission’ are ‘car dealers ‘, ‘travel agents’, ‘advertising agents’ etc. where these people are paid ‘commission’ in respect of a transaction between the buyer and the seller.

In the context of the observation of the leaned DCIR that the amount in question is not a trade discount since it was not allowed on invoice to invoice basis, the appellant wishes to clarify that there are various types of discounts, amongst which, ‘quantity based discount’, ‘payment based discount’, and ‘trade discount’ are most popular forms of discounts in the business parlance. The ‘quantity based discount’ is offered in order to motivate customers to buy large quantities because it allows the seller to save in many ways and this is

allowed both on invoice to invoice basis and on the basis of purchases over a period of time. Where majority of customers make purchases on credit basis, a seller offers ‘payment based discounts’ to its customers, tempting them to pay as soon as possible by offering a small discount on settling account without delay. A ‘trade discount’ is a discount from the list price allowed by a manufacturer or wholesaler to buyers in the same trade. This follows that it is not essentially required that reduction in price is allowed on invoice to invoice basis for an amount to be regarded as ‘discount’.

The matter that an amount represents ‘commission’ or ‘discount’ has been previously considered by the courts and strength may be drawn from case reported as 1994 PTD (Trib.) 1278 (Annexure “D”), in which after a thorough debate on the expressions ‘commission’ and ‘discount’ as defined in “words and phrases” Volume 7A and 12A, “Corpus juris Secundum” Volume 15A and 12A and due appreciation of the fact of the case, it was finally ruled that a buyer (Which the dealers are in present case) cannot earn commission on purchases made by him and in fact any reduction allowed in the purchase price is a ‘discount’. This finding also supports the case of the appellant thus not permitting any adverse influence.

It is, therefore, prayed that the claim of the appellant in respect of discount, amounting to Rs. 48,663,362/- may please be allowed.

04. That the DCIR has erred in making addition amounting to Rs. 1,182,809/- on account of actual gratuity payments under section 21 (e) and 34 (3) of the Ordinance.

In this connection, the appellant wishes to submit that the honorable Commissioner Inland Revenue (Appeals 1), Lahore had directed to allow the actual payment of gratuity amounting to Rs. 1,182,809/-. The learned DCIR, on the other hand, has repeated the action of his predecessor by disallowing the amount under this head by mentioning that:

In response to this office letter No. 9316 dated 17.05.2013 for verification of payments in respect of gratuity, the taxpayer has submitted the detail of employees and amount paid to each of them along with proof of payments in shape of bank statements. The reply of the taxpayer has been considered and the same is found untenable as the taxpayer failed to provide the copies of ledger, whereby entries of cheque no issued to different employees can be cross matched against name of each employee. Despite the fact that the same was categorically demanded vide above-referred letter. Therefore, addition of Rs. 1,182,809/- is made to the income of the taxpayer.

In this connection, the appellant wishes to submit that the learned DCIR was provided with complete employee-wise detail of gratuity paid vide its counsel’s letter No. T 508 dated 28.10.2011, which might have escaped the attention of the learned DCIR. The employee-wise detail of the payments made towards gratuity is being presented as Annex ‘E’.

It is, therefore, prayed that the learned DCIR may please be directed to allow the payments of Rs. 1,182,809/- made towards gratuity.

05. That the DCIR has erred in making addition of Rs. 3,490,000/- on account of payments made against outstanding balance of the discontinued provident fund by alleging that the company does not hold a valid certificate for the recognition of the provident fund.

In this connection, the appellant wishes to submit that the facts of the matter are that the appellant company got approval from the Commissioner Inland Revenue in respect of the provident fund established for both its non workmen and workmen employees in February 1, 1975; copy of the certificate of approval of the fund is being enclosed as Annexure F. The appellant however, wishes to add here that the fund was however partly discontinued later on, only to the extent of portion that represents its non workman employees. This fact was disclosed by the appellant company in its financial statements for the relevant period; copy of these financial statements is being enclosed as Annexure G.

The appellant also feels appropriate to add here that on this issue, the honorable Commissioner Inland Revenue (Appeals) had directed to reconsider the matter in the light of facts discussed above and in case the contribution was made to the approved provident fund, the same should be allowed.

Since the above referred certificate is still valid to the remaining part of provident fund that is being continued by the appellant company for its workmen staff, the company’s claim is admissible under the Law. It is, therefore, prayed that the declared version of the appellant company in this respect, may please be accepted.

06. That the DCIR has erred in disallowing medical and utility expenses amounting to Rs. 880,231/- (inadvertently written as Rs. 914,528/- in the order) under section 21 (h) of the Ordinance.

In this respect, the appellant wishes to submit that the honorable Commissioner Inland Revenue (Appeals 1), Lahore had decided the issue in following words:

“……. I think for application of 21 (h), this is not sufficient cause. If the treatment is provided to the family members of the directors in accordance with the terms of employment, naturally, the expense is for business. However, it has to be seen that this expense has been in the salary of the employee/director and tax has been properly deducted. In that case no addition u/s 21 (h) could be made. For ready reference section 12 (d) is reproduced as under:

(d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment.

The ACIR is directed to verify this aspect at the time of appeal effect.

In this respect, the appellant wishes to submit that these expenses represent re-imbursements made by the appellant company on account of medical expenses incurred by the employees in accordance with the terms of employment; Employee-wise detail of medical expenses is being enclosed as Annexure H.

Furthermore, the learned DCIR has disallowed the expense on the pretext that since the appellant has not deducted tax on the amount of medical expenses claiming that these are exempt from tax under clause 139 of Part 1 of Second Schedule to the Ordinance, the conditions prescribed in clause 139 of Part 1 of Second Schedule had also not been complied with, which inter alia require that the NTN of the Doctors and the Hospitals from where the employees got their medical treatment were to be provided. In this respect, the appellant wishes to submit summary of the medical expenses claimed, which is as under:

Description Medicines Etc.

Doctors, Consultan

cy

Hospitalization

Total

Medical aid Others Workers 175,183     175,183

Medical aid DP 352,133     352,133

Anjum Malik 67,451     67,451

Mansoor Jamal Butt 43,312     43,312

Rizwan Asghar 10,292     10,292

Description Medicines Etc.

Doctors, Consultan

cy

Hospitalization

Total

Rana Masood 33,510 44,350 77,860

S A Mannan 278,211 68,6

00 46,040 392,851

Tariq Rehman 100,324 - 87,959 188,283

Salem Rehman 52,349 33,9

67   86,316

Ahsan Suhail Mannan 84,021     84,021

Total1,196,78

6 102,567 178,349 1,477,70

2

The appellant also wishes o add here that in support of the claim, minutes of annual general meeting of the appellant company was also provided to the learned DCIR.

Since the entire medical expenses are properly verifiable and were in accordance with terms of employment, it is prayed that the learned DCIR may please be directed to allow the claim without drawing any negative inference.

07. That the DCIR has erred in disallowing the travelling expenses amounting to Rs. 1,595,048/- under section 21 (h) of the Ordinance.

In this respect, the appellant wishes to submit that the honorable Commissioner Inland Revenue (Appeals 1), Lahore had decided the issue in following words:

“……. I think for application of 21 (h), this is not sufficient cause. If the treatment is provided to the family members of the directors in accordance with the terms of employment, naturally, the expense is for business. However, it has to be seen that this expense has been in the salary of the employee/director and tax has been properly deducted. In that case no addition u/s 21 (h) could be made. For ready reference section 12 (d) is reproduced as under:

(d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment.

The ACIR is directed to verify this aspect at the time of appeal effect.

In this respect, the appellant wishes to submit that the major expenses under this head were incurred during the visit of “Director Production” to China for meeting with the appellant company’s suppliers for purchase of raw material, machinery and new technology. This includes negotiations for the import and installation of new Double Fired Wall Tile Plant and participation in the China International Ceramic Exhibition on behalf of the appellant company. The exhibition included art ceramics, house ceramics and gardening ceramics, held in Guangzhou China from May 20, 2008 to May 31, 2008.

It is, therefore, prayed that since these expenses were incurred by the appellant company wholly and exclusively for the purposes of its business, these expenses may be allowed as admissible expenses.

08. That the DCIR has erred in disallowing club expenses amounting to Rs. 154,252/- under section 21 (h) of the Ordinance.

In this respect, the appellant wishes to submit that the honorable Commissioner Inland Revenue (Appeals 1), Lahore had decided the issue in following words:

“……. I think for application of 21 (h), this is not sufficient cause. If the treatment is provided to the family members of the directors in accordance with the terms of employment, naturally, the expense is for business. However, it has to be seen that this expense has been in the salary of the employee/director and tax has been properly deducted. In that case no addition u/s 21 (h) could be made. For ready reference section 12 (d) is reproduced as under:

(d) the amount of any expenditure incurred by an employee that is paid or reimbursed by the employer, other than expenditure incurred on behalf of the employer in the performance of the employee’s duties of employment.

The ACIR is directed to verify this aspect at the time of appeal effect.

In this respect, the appellant wishes to submit that these expenses were incurred by the directors / executives wholly and exclusively for the purpose of business and entertainment of various suppliers and customers of the appellant company. The expenses were incurred as per appellant Company’s policy for development and promotion of its

business according to which directors / executives are provided with clubs memberships and allowed to incur entertainment expenses on behalf of company for developing / improving Company’s business relationships. In a judgment of ITA No. 98/KB/2007 (Annexure H) and 2000 PTD 3183 (Annexure I), such expenses are held admissible being incurred wholly and exclusively for business purposes.

It is, therefore, prayed that since these expenses were incurred by the appellant company wholly and exclusively for the purposes of its business, these expenses may be allowed as admissible expenses.