Black's Law Dictionary defines an 'Excise Tax' as follows: "In current usage the term has been extended to include various licence fees and practically internal revenue tax except the income tax (eg federal alcohol and tobacco excise taxes)."
In the Federal Excise Rules the concept of 'franchise' was introduced in June, 2006 through an SRO which outlined a franchise as: "'franchise' means an agreement by which the franchisee is granted representational rights to sell or manufacture goods or to provide service or to undertake any process identified with franchiser against an agreed fee or consideration including royalty, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved."
As is evident from the above, 'royalty' was also taken as a part or a specie of 'franchise'. Simultaneously, 'franchiser' was defined by these rules. It was taken for a person who entered into a franchise. The definition of 'franchiser' also covered an associate of the franchiser. The rules remained short of providing who a 'franchisee' was like. Introduced in 2006, the above definition of 'franchise' provided a cover to entry No 11 in the First Schedule of the Federal Excise Act.
THE ENTRY BEING: Through SRO No 561(I)/2006 dated 05 June, 2006, rule 43-A, 'Special Procedure for Excisable Services', was added to the Federal Excise Rules. It contained special procedure for payment of excise duty on franchise fee, technical fee or royalty under a franchise agreement.
This rule provided that the franchisee shall pay the duty. The liability for payment of duty on account of franchise, a franchiser would be subject to in terms of section 3(5)(c) if he rendered the service in Pakistan. If he was using the right to deal with the goods or services of the franchiser under a franchise agreement against a pre-determined fee or royalty, a franchisee was required to obtain registration from the Collector of Federal Excise and to pay excise duty on the franchise services.
Thus in terms of section 3(5)(c) of the Act, a person rendering the service in Pakistan was liable for payment of duty. However, according to rule-43A(2) the franchisee, receiving the service stood responsible for payment as such. Prescribed rate of franchise duty is five percent of the gross amount of taxable services.
In the absence of availability of value of taxable services, payment could be on the basis of franchise fee or deemed franchise/technical fee or royalty charged by the franchiser from the franchisee. The FBR (then CBR) in its zeal to collect revenue issued Federal Excise General Order (FEGO) No 04 of 2006 dated 01 July, 2006, containing machinery provisions for 'Levy and collection of excise duty on franchise fee/royalty and payment thereof'.
However, the Board soon realised that this could not work. Accordingly, this FEGO was superseded by FEGO No 05 of 2006 dated 05 August, 2006. It provided levy of 5% excise duty on gross amount remitted / paid to the franchiser or the amount laid down in the franchise agreement, in the event of existence of a proper agreement for a franchise.
When there was no formal agreement between a franchiser and a franchisee, the FEGO provided 5% excise duty on the value of concentrate supplied by a franchiser to the franchisee. This was applicable in the case of beverages produced with foreign franchise / brand names. In contrast, for the food sector enjoying foreign names / trade marks, 5% excise duty mandated was on the gross amount of franchise fee / royalty or the amount laid down in the agreement.
If there was no formal agreement between the parties it was pegged at 5% of net sales of the franchisee. The FEGO provides that when both franchiser and franchisee are local, liability to pay will be of the franchiser. The Following were some of the exceptions taken on the law existing till June-2008, mainly by producers of the foreign brand beverages.
1. In terms of section 3(1)(d) of the Federal Excise Act (Act), levy of duty could be on "services, provided or rendered in Pakistan". The bottlers were not providing or rendering any service eg franchise service, it was contended.
2. Section-3 of the Act read: "Duties specified in the First Schedule to be levied:
(1),(2,(3) & (4)).
(5). The liability to pay duty shall be:
(a)&(b)
(c). in case of services provided or rendered in Pakistan, of the person providing or rendering such service; and
(d)Thus, in relation to excisable services, liability to pay the duty was of the person providing or rendering the services. Since the bottlers were not providing any franchise services they incurred no liability on the account.
3. In Pakistan, independent companies manufacture concentrates. The concentrates are used for the production of beverages having foreign brand names. For formulae to produce the concentrates these local manufacturers pay royalty to the foreign suppliers.
Payments to these suppliers of formulae are made by the local manufacturers of concentrates with the approval of State Bank of Pakistan. No payment is made by the beverages' bottlers to anybody for production and marketing of syrup etc as such. Therefore, the bottlers are not subject to excise levy on franchise.
4. Federal Excise Duty could not be demanded from the bottlers with reference to Item No 11 of Table-II of First Schedule of the Act, added through Finance Act-2006, because of the bottlers non-rendering any 'franchise services'.
5. Rule-43A of Federal Excise Rules-2005 is not enacted or promulgated by the legislature. Rules-40 to 43-A of the Federal Excise Rules-2005 (Rules) titled 'Special Procedures for Excisable Services' are through a delegated legislation. The same not being in consonance with the Act did not attract liability to pay duty in terms of these rules.
6. 'Franchisee' was not defined by the Act. Till it is defined by the Act, a tax or duty liability on account of or related to 'franchise' can not be created. Liability to pay can be created through an Act of the Parliament or an Ordinance. Rules can not husband the Act and create liability for payment of a tax / duty which was not in text of the main law.
Sub-ordinate legislations, under delegated legislations can not go beyond being facilitators for implementation of provisions of enacted or promulgated legislations. They cannot change the Act in terms of inflicting liability to pay on the receiver of a service. Since these rules were in conflict with section 3 of the Act, they were ultra vires.
The Federal Excise General Order (FEGO) No 5/2006 dated 05-08-2006, mainly addressed to functionaries of the Department, is a sub-ordinate to the delegated legislation with the restricted status of a facilitator of the laws - statutory and delegated legislations. The FEGO is not a valid law for creation of tax liability on the (wrongly) so-called franchisees.
The words "and the term 'franchisee' shall be construed accordingly" appearing in rule 2(mb) in the Federal Excise Rules-2005 do not provide the needed valid legislation to inflict the liability for payment of duty.
7. Because a franchisee was not the person providing or rendering a service, sub-rule (2) of rule-43A of Federal Excise Rules was violative of the Act. As it attempts providing: "The duty shall be paid by the franchisee or as the case may be, the head office of the franchisee ........." it is in repugnance of the Act.
8. Section 3(4)(a) of the Act, pressed for creation of liability for exercise duty on account of franchise, was not a valid legislation in the wake of a producer / manufacturer declaring that he had no 'franchise' from the franchiser.
9.Under Rule 43-A(2) of the Federal Excise Rules, levy of the duty is contemplated on the basis of franchise fee, deemed franchise fee or technical fee or royalty "for using the right to deal with the goods or services of the franchiser".
Contrary to the above stipulation, at its number (ii), the FEGO contends that excise duty can be recovered on the basis of sale of goods eg concentrate. "........ assessable value for the purpose of levy of excise duty shall be 5% of the value of concentrate supplied by the franchiser to the franchisee", so reads FEGO No 05 of 2006.
What appears to have been totally overlooked is that there is no way a franchiser - franchisee relationship can be established between the seller and purchaser of the relevant concentrate. Stipulations at (ii) of the above FEGO, are not backed by and are not in keeping with the law. These are, therefore, ultra vires, not worth giving cognisance to, it is contended.
10. Permission to bottle is not a service received or rendered. It is an arrangement between two companies, one local and one foreign, who are not otherwise linked. May be the arrangement is fettered by obligation to purchase concentrate from a third party - the manufacturer in Pakistan. However, the Act does not cater such tri-partite arrangements.
11. Under the Federal Excise Act-2005, duty can be levied on imports, manufacturing or production of goods or the provision of services. Bottling self-manufactured syrup, the bottlers are not engaged 'in receipt of service from a third party', it is strongly argued.
12. First Schedule, Table-I (Excisable Goods) at S.No 11 mentions: "Franchise services". As against this the definition of "franchise" in the rules, referred to hereinabove, also includes "royalty". Thus, definition of "franchise" given in the rules and entry No 11 of the First Schedule as aforesaid do not go together. This restricts FBR's authority to recover duty on franchise.
To remove the lacunas in the law and to recover excise duty on 'franchise services', through Finance Act-2008, the following amendments were made in the Federal Excise Act:
(a). Definition of 'duty due' was inserted in the Act. The law now provides that excise duty could be in relation to both supplies made and services rendered. Earlier the law did not provide that duty could be due also in respect of services provided or rendered.
(b). Since levy of duty on franchise was contested also on the ground of its being in the rules, not in the text of the Act provided by the legislature, the definition was shifted to text of the main Act. Wording of definition of 'franchise' was improved with focus on recovery of duty on franchise.
According to the changes made in the Act through Finance Act-2008, 'franchise' is defined under sub-section (12a) of Section 2 of the Act with the following words:
""franchise" means an authority given by a franchiser under which the franchisee is contractually or otherwise granted any right to produce, manufacture, sell or trade in or do any other business activity in respect of goods or to provide service or to undertake any process identified with franchiser against a fee or consideration including royalty or technical fee, whether or not a trade mark, service mark, trade name, logo, brand name or any such representation or symbol, as the case may be, is involved."
The definition focuses on 'authority' by a franchiser to the franchisee: "......... against a fee or consideration including royalty or technical fee ......" in respect of goods or service etc. Its thrust is not on use of a trade mark, service mark, logo, brand name etc. A service mark, trade name etc may or may not be, that is what the present definition provides.
The above drafting of the definition of 'franchise' may be an improvement over the earlier definition. In the first instance, this definition appeared as rule 2(ma) of the Federal Excise Rules-2005 - but with a different set of words. The earlier definition as such is reproduced in the beginning of this paper.
The fact remains that to be able to recover excise duty on franchise under the law, the revenue would be required to establish a franchiser - franchisee relationship between the concerned parties which it may not find convenient to do given the law as it stands today.
Even if there be an agreement of franchise etc between the principals overseas and the bottlers, without an element of payment therein, purchase of concentrate by a bottler from the local concentrates' producer cannot be the basis for levy of excise duty on the bottles producers on account of franchise. Thus levy of excise duty on the basis of purchase of concentrate is not a valid law.
THE (PAKISTANI) CONTRACT ACT DEFINES 'BAILMENT, BAILOR AND BAILEE' AS FOLLOWS: "Bailment", "bailor" and "bailee" defined: A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called the "bailee"."
Accordingly, right of bottling given by foreign companies instead of being a franchise agreement is construed a bailment of right by the donor. Duty cannot be imposed on 'bailment' of rights or a 'bailment arrangement' under the Contract Act.
(c). Nomenclature of the sub-section (d) in charging section - 3, was replaced. Before the amendment in 2008 it enabled levy of duty on: "services, provided or rendered in Pakistan" This has now been substituted by the words: "services provided in Pakistan including the services originated outside but rendered in Pakistan."
(d). Earlier by virtue of following text of section 3(5)(c) liability to pay duty was:
"in case of services provided or rendered in Pakistan, of the person providing or rendering such service." Through the Finance Act-2008, the following words have been added in continuation of the above clause:
"....... Provided where services are rendered by the person out of Pakistan, the recipient of such service in Pakistan shall be liable to pay duty." According to law existing before 2008, a person rendering the service was liable for payment. By extension of liability for payment to 'recipient of services rendered by persons outside Pakistan' a fresh effort appears to have been made to bring the services in the excise duty net.
(e). In rule - 43A of the Act, providing 'special procedure for payment of federal excise on franchise fee or technical fee or royalty under a franchise agreement', the following words appeared problematical to the end of recovery of duty: "using the right to deal with the goods or services of the franchiser under a franchise agreement against a pre-determined fee or royalty."
To facilitate recovery of the duty as such, through SRO No 546(I)/2008 dated 11 June, 2008 these words were substituted by: "availing any right under a franchise as defined under clause 12(a) of section 2 of the Act".

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S. No Description of Goods    P.C.T. Heading                  Rate of Duty
11    Franchise services      9823.0000        Five percent of the charges
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