Law: Income Tax Ordinance, 2001

Section: 148,148(7),177,122(5A),21(c),2(54)&152(1 ),23,221,21(g)&34(3),75,67,113,222

(a) Income Tax Ordinance (XLIX of 2001)----Ss. 148(7), 177 & 122(5A)---Imports---Tax withheld at import stage in respect of vehicles given to employees under Employees Cars Scheme, had been held to be discharge of final tax liability and depreciation on such vehicles had been held to be an inadmissible deduction---Assessee contended that provisions of S.148 (7) of the Income Tax Ordinance, 2001 were applicable to the "Commercial Imports" i.e. goods which were imported for onward sale only whereas the goods which were imported for self-utilization, not involving any subsequent sale/profit, were not covered by the provisions of S.148(7) of the Income Tax Ordinance, 2001---Validity---Held, there was no confusion or disagreement between the parties that subject items (vehicles) were not commercial imports and were meant for self-use in the business---Word "commercial import" did not figure in law and to this extent the contention of the Department was correct, however, when the provision of S. 148(7) of the Income Tax Ordinance, 2001 were minutely examined it transpired that legislature had used the words "...income of the importer arising from.... "---Such words, particularly the word 'arising', made the intention of the legislature manifestly clear---By reference to these words, what was brought within the ambit of final tax regime was a transaction which involved an import to made a profit i.e. a commercial import or import undertaken for resale with the intention of making profit---Definition of expression 'income' itself includes the amount subject to collection of tax under S.148 of the Income Tax Ordinance, 2001 but had the intention been to treat all types of transaction as 'income' the legislature would have not used the words "income of the importer arising from" rather the wording would have been ".... the tax collected under this section shall be a final tax .... "---Said cautious and discreet choice of words made it amply clear that within the scope of final tax regime only those goods fell which were imported for resale to make a profit---Items which were imported for the purpose of self-use fell outside the ambit of final tax regime---Tax withheld/collected at the import stage in respect of the vehicles remained an. adjustable advance tax---Further, Taxation Officer had also no valid basis/reason to disallow the depreciation---Orders of the authorities below on such account was annulled by the Appellate Tribunal and it was directed that depreciation be allowed to the taxpayer. 

I.T.A. No.1885/KB of 2002 ref.

2004 PTD 1251 rel.

(b) Income-tax---

----Royalty on self manufactured capitalized vehicles---Disallowance---Depreciation attributable to royalty (paid by the taxpayer to its parent company under Licence Agreement) in respect of vehicles manufactured by it and capitalized in the financial statement was disallowed---Assessee contended that Taxation Officer in the case of taxpayer had held that no royalty was payable yet the department while assessing the income of the recipient had colleted tax on royalty including the subject amount; stance of the department was self-contradictory; on the one hand the department did not allow deduction of expense on account of royalty but collected tax from the recipient under the same head---Validity---Contradictory nature of stance of department was obvious as on the one hand tax was being collected by treating the amount as royalty in the hands of recipient but it was being disallowed as a deduction on the other in the case of the tax payer---Appellate Tribunal directed deletion of the disallowance as the department could not be allowed to blow and cold in the same breath---Addition was also made without confronting the taxpayer, which was against the principles of natural justice---Addition was not sustainable both on factual and legal grounds. 

GST 2003 LR 79 rel.

2004 PTD 441 ref.

(c) Income Tax Ordinance (XLIX of 2001)---

----Ss. 21(c), 2(54) & 152(1)---Deductions not allowed---Amortization of licence fee---Royalty---Disallowance of deduction claimed on account of 'initial license fee' by holding that withholding tax was deductible at the rate of 30%.of the gross amount of fee as against the rate of 15% effected by the taxpayer---Assessee contended that initial licence fee was 'royalty' in nature and attracted 15% withholding tax rate which was correctly applied while effecting payment; that amount was on account of use of model/design which was classifiable as royalty under the provisions of S.2(54) of the Income Tax Ordinance, 2001; that since law itself provided that amounts for specified heads would remain a royalty, howsoever described, the initial fee being an amount for use of design/model remained royalty and that department had itself treated the amount as royalty in the hands of the recipient---Validity---Amount was clearly paid in consideration of use of design/model which could be classified as royalty under the relevant provisions of law and could not be given a treatment other than the one given by the taxpayer itself---Disallowance was deleted by the Appellate Tribunal being not sustainable under the law. 

(d) Income Tax Ordinance (XLIX of 2001)---

----S. 21(K)---West Pakistan Canteen Rules, 1959---Circular No. 16 of 1990 dated 4-12-1990---Deductions not allowed---Excess cost of perquisite---Canteen subsidy, cost of living allowance and freight and handling charges---Cost, of living allowance was treated by the taxpayer as part of salary for computing excess cost of perquisite, the other two amounts were not categorized as perquisites for the purpose of S.21(k) of the Income Tax Ordinance, 2001---Addition by treating all the three amounts as perquisites for the purpose of working out excess perquisites under S.21(k) of the Income Tax Ordinance, 2001---Validity---Taxation Officer did follow the instructions contained in Circular No.16 of 1990 regarding issue of canteen subsidy by observing that the circular granted concession to 'expenditure 'incurred on maintenance of canteen' and did not apply to provision of subsidized food---Matter needed reconsideration in the light of Board's circular as well as the case-law---Orders of both the authorities below was set aside and matter was remanded for fresh decision in the light of instructions as well as case-law. 

2008 PTD 1559 and (1998) 77 Tax 2004(sic) rel.

(e) Income-tax---

----Profit and loss expenses---Summarily disallowance of expenses on account of tax consultancy charges, customs clearing charges and petty production expenses-Explanation submitted was arbitrarily rejected and no reason whatsoever was recorded for not accepting the taxpayer's contention---Practice of brushing aside of defence without assigning any reason could no be subscribed---Order had to be a speaking order and each and every contention of taxpayer had to be considered and dealt with carefully---Disallowance was deleted by the Appellate Tribunal. 

(f) Income-tax---

----Apportionment of expenses---Appeal---Request for apportionment of expenses after taking into account various disallowances and additions---Taxation Officer was directed to make apportionment of expenses in accordance with law at the time of passing the appeal effect order. 

(g) Income Tax Ordinance (XLIX of 2001)---

----Ss. 23 & 221---Initial allowance---Initial depreciation allowance on assets---Taxation Officer concluded that initial depreciation allowance was wrongly claimed as the assets were put to use for the first time in the preceding year by relying upon that order for the purchase of goods was placed in March 2005 which fell wit/tin the tax year 2005; and that the items of machinery related to discontinued model meaning thereby that machinery had no relevance with the current year---First Appellate Authority observed that there was no economic effect of the matter because if initial depreciation was allowed in the preceding year, refund would become due which offset the impact of disallowance in the current year---Department contended that principles of taxation did not recognize the concept of economic effect and affairs of every year to be dealt with independently---Validity---How placement of order for acquisition of an item of machinery in the preceding year could be proved that the said asset was also put to business use in the preceding year---No doubt, model was the discontinued one, but manufacture of parts of an older model would essentially continue as a part of after sale activity---Basis adopted was misconceived-Taxpayer in the preceding year disclosed the amount as capital work in progress in audited statements of accounts which could not be brushed aside casually on the basis of whims, conjectures and surmises---If the _ Taxation Officer had acted judiciously he would have simultaneously allowed initial depreciation in the preceding year by resorting to provisions of S.221 of the Income Tax Ordinance, 2001, but he had not adhered to principle of equity and justice---Finding of First Appellate Authority was maintained by the Appellate Tribunal. 

(h) Income Tax Ordinance (XLIX of 2001)---

----S. 148(7)---Imports---Warranty parts---Presumptive Tax Regime--Import of spare parts utilized in warranty services were held to be not covered by the final tax regime by the First Appellate Authority---Validity ---Final consumption was relevant for determining the mode of their taxation---If these parts had not been resold but provided free of cost as replacement under warranty scheme the tax collected al import stage would not constitute a final tax---Such will be covered by the exception of S.148(7) of the Income Tax Ordinance, 2001 being import of equipment for own use---Order of First Appellate Authority was upheld by the Appellate Tribunal. 

(i) Income Tax Ordinance (XLIX of 2001)---

----Ss. 21(g) & 34(3)---Deductions not allowed-Provision for customs duty was disallowed on the ground that the same did not meet the requirement of S.34(3) of the Income Tax Ordinance, 2001; and was also in the nature of a penalty which was not an allowable expense .in terms of S.21(g) of the Income Tax Ordinance, 2001--- Order of Taxation Officer was vacated by the First Appellate Authority---Validity---Disputed amount was neither in the nature of a fine nor a penalty; rather it was a provision on account of principal amount of customs duty---Order of First Appellate Authority was maintained by the Appellate Tribunal. 

(j) Income Tax Ordinance (XLIX of 2001)---

----S. 75(3A)---Disposal and acquisition of assets---Obsolete plant and machinery written off---Claim on account of loss from writing off of obsolete plant and machinery was held to be an admissible deduction by the First Appellate Authority---Department contended that when an asset was disposed of, the department had the authority to compute sale consideration on the basis of fair market value; since company had ignored fair market value of the obsolete machinery and claimed deduction of amount representing the book value of machinery, the Taxation Officer was justified in disallowing the deduction---Assessee contended that once write-off was treated as disposal under S.75(3A) of the Income Tax Ordinance, 2001, the general principle of fair market value was inapplicable---Validity ---Order of First Appellate Authority was upheld and departmental appeal was dismissed by the Appellate Tribunal. 

I.T.A. No.1003/LB of 2008 rel.

(k) Income-tax---

----Advertisement expenses---Direction to curtail the disallowance---No dispute between the parties that identified expenditure pertained to final tax regime---After ascertaining factual position from the relevant documents it was agreed with the taxpayer that addition had been made twice and order was annulled to that extent---Department could not establish the existence of any error or legal infirmity in the order---There being no mistake in the order of First Appellate Authority, the same was upheld and confirmed on the point by the Appellate Tribunal. 

(l) Income Tax Ordinance (XLIX of 2001)---

----S. 67---Apportionment of deductions---Attribution of common expenses---Other income---Allocation of certain expenditure to other income on the basis of provisions of S.67 of the Income Tax Ordinance, 2001---Taxation Officer rejected the computation and held that no expenses could be allocated to "other income "---Addition was cancelled by the First Appellate Authority by placing reliance on the order of Appellate Tribunal---Since treatment meted out was based upon on existing binding precedent, there was no irregularity in the order of First Appellate Authority---No interference was called for and order was upheld by the Appellate Tribunal.

(m) Income Tax Ordinance (XLIX of 2001)---

----S.113(2)(c) & First Sched., Division-II, Part-I---Minimum tax on the income of certain persons---Difference between the liability to pay minimum tax @ 0.5% of turnover and the liability under Part I of Division II of First Schedule of the Income Tax Ordinance, 2001 was carried forward which the First Appellate Authority had confirmed to be correct---Validity---There being no confusion in the language used in the statute, the action of Taxation Officer was held to be illegal, which had been rightly vacated by the First Appellate Authority.

(n) Income Tax Ordinance (XLIX of 2001)---

----S. 222---Rectification of mistake---Refund adjustment---Adjustment of refund relating to prior years was not allowed---First Appellate Authority held that it was rectifiable matter and assessee was directed to pursue the matter through filing a rectification application which Taxation Officer would dispose of in accordance with law after affording appropriate opportunity to taxpayer---Validity---Nothing was wrong with directions of First Appellate Authority---Appeal on said ground was also rejected by the Appellate Tribunal.

ORDER 

These two cross appeals, one filed by the taxpayer and the other by the department, impugned the same appellate order dated 5-5-2009 passed by the CIR(Appeals) under section 129 of the Income Tax Ordinance, 2001 (hereinafter referred to as `Ordinance'). The said order was passed in consequence of the appeal preferred by the taxpayer against the amended assessment order dated 30-5-2008 issued under section 122(5) read with section 177 of the Ordinance. 

2. Facts for the purpose of disposal of these appeals, in brief, are that the taxpayer is a quoted public limited company engaged in the business of assembling/manufacturing of motor vehicles under the brand name 'Honda'. It is also engaged in the sale of spare parts as its 'after sale activity'. It filed the return of income for the tax year 2006 on the due date and declared taxable income at Rs.935,323,668. Subsequently the case was selected for audit under section 177 of the Ordinance by the concerned commissioner and on conclusion of audit proceedings a show-cause notice was issued whereby the company was required to explain its position vis-a-vis issues which cropped up during the course of audit. The Taxation Officer, not feeling convinced by the reply submitted by the taxpayer proceeded to amend the assessment order under section 122(1) of the Ordinance and raised tax demand of Rs.119,341,911 against the company. 

3. The said order was contested by the taxpayer in appeal before the first appellate authority, which allowed partial relief to the taxpayer company on certain points. The company, still feeling dissatisfied with the quantum of relief has come up in further appeal before us whereas the Revenue has assailed the order of the CIR(Appeals) on points where relief was allowed to the taxpayer. Since both the appeals impugned the same appellate order, we take up these appeals together and dispose them of through this consolidated order as under:- 

TAXPAYER'S APPEAL 

(i) Imported Honda Accord in CBU condition 

4. Through grounds of Appeals Nos.2 and 3 the taxpayer has challenged the finding of the authorities below whereby (i) the tax withheld at the import stage in respect of seven imported vehicles given to the employees under Employees Cars Scheme, has been held to be discharge of final tax liability and (ii) the depreciation on these vehicles has been held to be an inadmissible deduction under the law. The learned AR of the company contended that the Taxation Officer has incorrectly held that the import of the seven vehicles fell within the ambit of Presumptive Tax Regime in terms of provisions of section 148(7) of the Ordinance, as the imported vehicles were meant for self-use and as such final tax regime was not applicable because of the explicit exception available in the law. Since matter relates to the interpretation and application of section 148(7) of the Ordinance, it would be appropriate if' the relevant provisions are reproduced hereunder for the sake of reference:-- 

"Except in case of an industrial undertaking importing goods as raw materials, plant/machinery and equipment for its own use, the tax collected under this section shall be a final tax on the income of the importer arising from the imports subject to sub-section (1)". 

5. The learned AR of the company contended that the plain reading of the provisions of section 148(7) of the Ordinance, suggests that they are applicable to the "Commercial Imports" i.e. the goods which are imported for onward sale only whereas the goods which are imported for self utilization, not involving any subsequent sale/profit, are not covered by the said provisions of law. This position, the A.R. elaborated, was itself explained by the Finance Ministry at the time when in the year 1991 these provisions were brought onto the statute book. The AR went on to explain that the following position vis-a-vis final tax on imports is already documented in the budget speech for the relevant year:-- 

"We, therefore, propose that for persons whose only source of income is contracts, supplies and commercial imports, the withholding tax itself be treated as the final tax liability." 

To reinforce his argument the AR referred to the decisions of this Tribunal in ITA No.1855/KB/2002 dated 29-3-2004 and 2004 PTD 1251 wherein it has been held that only those commercial imports which are undertaken for subsequent sale are covered by the PTR whereas imports for self utilization/consumption remain outside the purview of the final tax regime. It was argued that in above quoted judgments of the Tribunal both the intension of legislature and scope of these provisions have been discussed at length. In the latter judgment the Tribunal categorically held as under:-- 

"Although section 80-C(2)(ii) does not provide any exception from said provision to a commercial importer as claimed by the learned A.R. for the assessee, yet the entire Scheme of Presumptive Tax Regime is focused on taxing the deemed income which is in the nature of turnover or sales of such goods, which are subsequently sold and generate profits." 

6. As an alternate argument, the A.R. pleaded that in any case the subject vehicles were in the nature of 'plant' and as such stood excluded from the purview of the Presumptive Tax Regime. In this respect reliance was placed on the case reported as GST 2003 CL 79 wherein the honourable Sindh High Court, while dealing with 'dump trucks', held that they were 'plant' for all practical purposes. The honourable High Court while dilating upon the scope of "Plant" made reference to various dictionaries and lexicons and after detailed deliberation observed that the expression 'plant' was a very wide and all-embracing term and its meaning and scope would continue to develop with the evolution of business. Relying upon the ratio of the judgment, the learned AR submitted that the subject items (vehicles) being in the nature of 'plant' were not covered by the final tax regime as there was no dispute that the taxpayer was an industrial undertaking and the vehicles were imported for its own use. 

7. The learned A.R. further submitted that even if the tax withheld at the import stage was held to be final discharge of tax liability, it was not understandable as to why statutory depreciation on the vehicles had been disallowed. He asserted that there was no rebuttal to the fact that the asset was used for the purpose of the business and the expenditure was also not in the nature of one covered under section 169(2)(b) of the Ordinance. It was submitted that by no stretch of imagination, could this depreciation be termed as an expenditure incurred for 'deriving' income taxable under the final tax regime. The learned AR thus concluded that the taxpayer had been incorrectly denied the benefit of depreciation without any justification. 

8. The learned DR, on other hand, reiterated the contention of the Taxation Officer as embodied in his order and argued that the words 'Commercial Imports' are not there in the statute and as such the tax remains final tax liability by reference to what is expressly provided in section 148(7) of the Ordinance. He argued that court had to look at only what had been provided for in the law and not beyond that. On our specific query, the learned DR, however, could not satisfactorily distinguish the decisions in I.T.A. No.1855/KB of 2002 dated 29-3-2004 and 2004 PTD 1251, relied upon by the taxpayer. On the argument of the taxpayer relating to 'plant' the DR submitted that the facts of the case of the taxpayer were clearly distinguishable from the one dealt with by the honourable Sindh High Court. In this context, he argued that in order to ascertain as to whether an item was "Plant" or not, one has to look at the headings given in the Pakistan Customs Tariff and only such items, as are classifiable under chapters 84 and 85, can be regarded as plant and machinery. It was further explained that the vehicles being covered by chapter 87, could not be regarded as plant and machinery and, therefore, not covered by the exclusion specified in section 148(7) of the Ordinance. 

9. We have considered the rival arguments, examined the available record and gone through the judgments relied upon by the learned A.R. There is no confusion or disagreement between the parties that the subject items (vehicles) were not commercial imports and were meant for self use in the business. The issue to be decided is whether tax withheld on such import is a presumptive tax or adjustable advance against the tax payable on business profits. The word "commercial import" does not figure in the law and to this extent the contention of the DR is correct. However, when the provisions of the section 148(7) of the Ordinance are minutely examined it transpires that the legislature has used the words ....income of the importer arising from...". These words, particularly the word 'arising', make the intention of the legislature manifestly clear. By reference to these words, in our view, what is brought within the ambit of final tax regime is a transaction which involves an import to make a profit i.e. a commercial import or import undertaken for resale with the intention of making profit. No doubt the definition of expression 'income' itself includes the amount subject to collection of tax under section 148 of the Ordinance but had the intention been to treat all types of transactions as `income' the legislature would have not used the words "income of the importer arising front" rather the wording would have been'....the tax collected under this section shall be a final tax,..This cautious and discreet choice of words makes it amply clear that within the scope of final tax regime only those goods fall which are imported for resale to make a profit. This rationale has already been appreciated in the decision 2004 PTD 1251 referred to supra and following this judgment, we hold that the items which are imported for the purpose of self-use fall outside the ambit of final tax regime. Accordingly, we hold that the tax withheld/collected at the import stage in respect of the vehicles remains an adjustable advance tax. As regards depreciation, we have not been able to understand the basis for disallowing the depreciation and hold that the Taxation Officer had no basis valid reason to disallow the depreciation. We, therefore, annul the orders of the authorities below on this account and direct that depreciation be allowed to the taxpayer as per law. 

(ii) Royalty on self manufactured capitalized vehicles 

10. Through grounds Nos. 4 and 5 the taxpayer has challenged the treatment accorded by the Taxation Officer whereby/depreciation attributable to royalty (paid by the taxpayer to its parent company under License Agreement) in respect of vehicles manufactured by it and capitalized in. the financial statement has been disallowed. The addition under this head aggregates to Rs.122,889 Relevant facts, succinctly stated, are that in respect of thirty cars manufactured and capitalized by the taxpayer, the Taxation Officer confronted the taxpayer with his intention of treating the capitalization as sale and disallowing depreciation claimed thereon. In forming this opinion, the Taxation Officer made a reference to sales tax invoices, generated by the taxpayer, in respect of these vehicles. In response, the taxpayer company submitted a detailed explanation which the Taxation Officer appears to have accepted. However, he proceeded on to disallow the depreciation attributable to royalty paid by the taxpayer to its principal. In this respect the Taxation Officer observed that under the relevant clause of the License Agreement the taxpayer was required to pay royalty in respect of vehicles that are "manufactured and sold". Relying upon these words, the Taxation Officer concluded that no royalty was payable in respect thereof as the subject vehicles were not sold. He, therefore, disallowed depreciation attributable to the component of royalty. 

11. The AR while explaining the background submitted that up until the previous year, royalty, under the License Agreement, was payable to the principal in respect of products "assembled, manufactured, sold or otherwise disposed of". This scope was modified in the current year to bring within the ambit of royalty payments for the products "assembled, manufactured and sold or otherwise disposed of". Elaborating the impact of the change, the learned AR submitted that the modification was introduced principally to exclude from the ambit of royalty such vehicles as are imported in CBU condition and sold locally like Honda Accord. It was clarified that had the scope of royalty been not modified, the principal could have demanded royalty independently on sale of a product not manufactured locally. The intention behind the modification was to restrict payment of royalty only on locally manufactured products. It was further submitted that in the present case both the recipient and the payer are clear on the scope of agreement and the agreement is being implemented as per mutual understanding. The Taxation Officer, the learned AR submitted, had no mandate to interpret the agreement otherwise and in this respect relied upon the case 1991 PTD 488 wherein the apex court had strongly disapproved of such action by tax authorities. Explaining the facts further the learned AR submitted that although the Taxation Officer in the case of taxpayer has held that no royalty to this extent was payable yet the department while assessing the income of the recipient has collected tax on royalty including the subject amount. The learned AR submitted that the stance of the department is self contradictory---on the one hand the department does not allow deduction of expense on account of royalty but collecting tax from the recipient under the same head on the other. Lastly it was argued that in any case the disallowance was illegal as the taxpayer was never confronted on this point specifically and as such it was illegal on his part to draw adverse inference on a point that was never confronted to the taxpayer through the statutory notice. 

12. The learned DR, in his turn, reiterated the contention of the Taxation Officer and argued that no such royalty was payable under the License Agreement. He, however, could not give satisfactory answer when asked as to how the department taxed the amount as royalty in the case of the non-resident recipient if it was not considered and allowed as an expense of the appellant. Likewise, the DR had no answer to the decision of the apex court cited supra. Regarding the contention of the learned A.R that the appellant had never been confronted with the disallowance of Royalty, the DR submitted that the issue was an off shoot of the matter confronted to the taxpayer and thus Taxation Officer was legally justified in proceeding with the disallowance. In this respect he relied upon the case reported as 2004 PTD 441. 

13. We have considered the rival submissions and are persuaded to agree with the submissions of the learned AR of the taxpayer that the scope of royalty has not been properly appreciated by the Taxation Officer. It was clearly to exclude the possible demand of royalty in respect of sale of imported CBU cars that change was introduced. Contradictory nature of the stance of the department is obvious as on the one find tax is being collected by treating the amount as royalty in time hands of recipient but it' is being disallowed as a deduction on the other in the case of the payer. We are, therefore, unable to subscribe to self f contradictory treatment and direct deletion of the disallowance as the department cannot be allowed to blow hot and cold in the same breath. Besides, the addition was made without confronting the taxpayer, which is against the principles of natural justice. Such an addition is, therefore, not sustainable both on factual and legal grounds. 

(iii) Amortization of License Fee 

14. In connection with grounds Nos. 6 and 7, it is the stance of the taxpayer that the learned Taxation Officer has erred in interpreting the provisions of section 152(1) of the Ordinance, thereby disallowing the deduction claimed on account of 'initial license fee' by an amount of Rs.6,310,526 under section 21(c) of the Ordinance by inadvertently holding that withholding tax was deductible at the rate of 30% of the gross amount of fee as against the rate of 15% effected by the taxpayer. Furthermore, it has also been agitated that the learned Taxation Officer erred in making disallowance of Rs.6,310,526 by misinterpreting the provisions of section 21(c) of the Ordinance and holding that disallowance under the said provisions is applicable in respect of the entire amount of deduction without appreciating the position that such provisions provide for disallowance only to the extent of amount not subjected to deduction of withholding tax. The learned AR of the taxpayer has argued that the initial license fee is 'royalty' in nature and, under the law, attracted 15% withholding tax rate which was correctly applied by the taxpayer while effecting the payment. Under the provisions of law, the learned A.R argued that, the amounts are classifiable as royalty as they are a consideration of right to use design or model, trademarks etc. The subject payment was made to the parent company for adopting the design and specification, in Pakistan, of new model of the Honda City brand motor vehicle introduced abroad. Under the License Agreement, the taxpayer company, in addition to a perpetual royalty payment for manufacturing and selling vehicles under the brand name 'Honda', is required to pay a one-time 'initial fee' on account of acquisition of rights to manufacture a newly introduced model of a motor vehicle with the same specification/design as is introduced by the recipient from time to time and for which the recipient holds the proprietary rights. In this background, the learned AR submitted that the amount was on account of use of model/design which is classifiable as royalty under the provisions of section 2(54) of the Ordinance. Since the law itself says that amounts for specified heads would remain a royalty, howsoever described, therefore the initial fee being an amount for use of design/model remains royalty. Elaborating further the learned AR submitted that in this case the department has itself treated the amount as royalty in the hands of the recipient. He submitted a copy of the return of the recipient company to substantiate his assertion and requested deletion of the disallowance.

15. The DR on the other hand, took us through various parts of the order of the authorities below but could not satisfy us about the varied treatment the department itself has given for the same amount in the case of payer and recipient.