HONDA ATLAS CAR PAKISTAN LTD. VS FEDERATION OF PAKISTAN, 2016 PTD-LAHORE-HIGH-COURT-LAHORE 1328 (2016)

Federal Excise Act (VIII of 2005)---

----Ss. 2(3), 2(12a), 3 & First Sched.---Federal Excise General Order No. 4 of 2006, dated---Imposition of Federal Excise Duty on franchise services---"Franchise services"---Definition, nature and scope---Petitioner, engaged in the business of manufacture and sale of automobiles, challenged levy of federal excise duty for franchise services provided to the petitioner under a Licence and Technical Assistance Agreement with a foreign automobile manufacturer---Contention of petitioner, inter alia, was that it did not receive "franchise services", in terms of the definitions of the words "franchise" and "services" under Ss. 2(23) & 2(12a) of the Federal Excise Act, 2005, respectively---Validity---Franchising was a business relationship between the parties where the franchisor serviced and facilitated the business of the franchisee within defined parameters---In the present case, perusal of the agreement between petitioner and the foreign automobile manufacturer revealed that the petitioner ran its business in accordance with the foreign automobile manufacturer's model and the petitioner essentially purchased a business package from the foreign automobile manufacturer which entailed provisions of services aimed at guaranteeing a uniform operation and style of the product and for such services, the petitioner paid a fee and royalty---Fact that technical assistance and know-how under the agreement remained the proprietary right of the foreign automobile manufacturer did not mean or suggest the same was not a service provided by the foreign automobile manufacturer; and furthermore, the fact that the petitioner manufactured the automobiles did not take the ambit of the agreement out of franchise services, as the petitioner manufactured and sold said automobiles in Pakistan and also proved after sale services---Franchise services provided by the foreign automobile manufacturer were for manufacture, sale and all related services provided by the petitioner and the same fell within the ambit of "franchise" and "services" under the Federal Excise Act, 2005---Agreement between the parties in fact provided a way of doing business to the petitioner, which tantamount to a service provided by foreign automobile manufacturer and therefore, since the same was a service provided to the petitioner which originated outside Pakistan but was rendered in Pakistan, petitioner was liable to pay federal excise duty under S.3 of the Federal Excise Act, 2005---Constitutional petition was dismissed, in circumstances.

Dr. MB Ankalsaria v. Commissioner of Wealth Tax, Karachi 1992 SCMR 1755; Diamond Food Industries Limited v Joseph Wolf GmbH & Co. and another 2004 CLD 343 and Amin Textile and others v. Federation of Pakistan and others 2002 CLC 1714 ref.

(b) Franchise---

----Franchise agreement---Connotation---'Franchisor' and 'franchisee'---Rights and obligations---Franchise agreement allowed the franchisee the right to use the mark or patent of a franchisor for a royalty or fee and the franchisee must ensure that the goods or services maintained the uniformity and standard of the franchisor's goods or services----Franchisor provided technical assistance and know-how to protect its mark or patent so as to ensure uniformity in quality and therefore, a franchisor shared its business model with all relevant details so that the franchisee could use the patent, logo or mark of the franchisor and maintain the standard, style, quality and look of the product or services provided, as if it was given by the franchisor itself---Franchisor must grant the franchisee the right to use its patent or mark or logo, that was its intellectual property, to the extent necessary to operate the franchisee business---Franchisor also provided the assistance and know-how in support of the business and helped solve problems along the way.

Waleed Khalid and M. Shoaib Rashid for Petitioner.

Muhammad Zikria Shikh, DAG for Pakistan.

Sarfraz Ahmad Cheema and Shahzad Ahmad Cheema for Respondents.

Date of hearing: 22nd January, 2016.

JUDGMENT

AYESHA A. MALIK, J.---Through this petition, the Petitioner has challenged the levy of federal excise duly on the Petitioner for the franchise services provided to the Petitioner under its License and Technical Assistance Agreement dated 01.04.1994 between the Petitioner and Honda Japan.

2.Briefly the facts of the case are that the Petitioner is engaged in the business of manufacture and sale of Honda automobiles. The Petitioner entered into a License and Technical Assistance Agreement ("Agreement") with Honda Motor Company Japan, a corporation registered under the laws of Japan, with its principal office in Tokyo Japan. In terms of the Agreement, the Petitioner has been granted a license to assemble, manufacture and sell automobiles using the Honda patent. The Petitioner also receives technical assistance to use the Honda patent to manufacture and sell Honda automobiles in Pakistan. The Respondents have levied federal excise duty under the Federal Excise Act, 2005 ("Act") on the franchise services received by the Petitioner under the Agreement. The Petitioner is aggrieved by this levy, hence this Petition.

3.Learned counsel for the Petitioner argued that the Petitioner does not receive any franchise services under the Agreement, hence is not liable to tax under the Act. Learned counsel explained that "franchise" is defined under Section 2(12a) of the Act whereas "services" is defined under Section 2(23) of the Act. He argued that in terms of the definition of the two words, the Petitioner does not receive any franchise service which can be taxed under the Act. He argued that there is a contractual arrangement with Honda Japan whereby the Petitioner has been granted a license to assemble and sell Honda automobiles using the Honda patent and its Know How. He argued that in terms of Section 3(1)(d) of the Act no services are being provided to the Petitioner by Honda Japan which are subject to the levy of Federal Excise Duty. It is the case of the Petitioner that the use of a patent under the Agreement is not a service but is use of a movable property which cannot be called a service. He argued that Honda Japan is the owner of the patent and merely shares its technical knowledge so as to protect its patent and ensure standardization of its product. Further argued that the Agreement is not an agreement for services but in fact is an agreement for permission to use the patent of Honda Japan which is not a taxable service. Hence, the levy of federal excise duty on the so called services provided by Honda Japan to the Petitioner is ultra vires to the Constitution, the Excise Rules and General Order No.4. Reliance has been placed on Dr. MB Ankalsaria v. Commissioner of Wealth Tax, Karachi (1992 SCMR 1755), Diamond Food Industries Limited v Joseph Wolf GmbH & Co. and another (2004 CLD 343) and Amin Textile and others v. Federation of Pakistan and others (2002 CLC 1714).

4.On behalf of the Respondents it was argued that under the Agreement, the Petitioner is provided franchise services which are subject to federal excise duty under Section 3 of the Act. It is their case that the relationship between Honda Japan and the Petitioner is such that the Petitioner is allowed to use the patents, design and other proprietary rights of Honda Japan to manufacture and sell Honda automobiles in Pakistan. Under the Agreement, Honda Japan provides the Petitioner all its secret technical information, its Know How, data, formulae including designs, drawings, standards, specifications, technical record, manuals, material lists and direction maps. The grant of this technical assistance is a service for the purposes of the Act and without this service the Petitioner cannot manufacture Honda automobiles in Pakistan. Further argued that furnishing of all technical assistance and Know How is a service which is subject to the tax. He argued that it is not movable property of the business of the Petitioner as Honda Japan's provision of technical Know How and assistance to the Petitioner is a service which enables the Petitioner to manufacture, assemble and sell vehicles.

5.Heard and record perused.

6.The Petitioner has challenged the levy of federal excise duty on the franchise services provided under the Agreement on the ground that it does not receive franchise services from Honda Japan. Section 3(1)(d) of the Act levies federal excise duty on services provided in Pakistan, including services which originate outside of Pakistan but provided in Pakistan. Franchise services are provided in Table II of the First Schedule of the Act as item No.11. Franchise is defined in Section 2(12a) of the Act as follows:--

"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."

Services have been defined in Section 2 (23) of the Act as follows:--

"Services" means services, facilities and utilities leviable to excise duty under this Act or as specified in the First Schedule read with Chapter 98 of the Pakistan Customs Tariff, including the services, facilities and utilities originating from Pakistan or its tariff area or terminating in Pakistan or its tariff area."

The Respondents FBR then issued General Order No.4/2006 which provided the manlier in which assessable value of the franchise services could be determined for levy of excise duty on the franchise fee or technical fee or on royalty. In terms of the definition given the word "franchise services" means the services facilities and utilities provided in the First Schedule. Franchise is the right to produce, manufacture, sell or deal in any product or business or service for a fee or consideration including a technical fee or royalty. Therefore, a franchise agreement will grant the franchisee the right to operate its business in the name and style of the franchisor's business. So in essence it is a way to do business. A franchise agreement allows the franchisee the right to use the mark or patent of a franchisor for a royalty or fee. The franchisee must ensure that the goods or services maintain the uniformity and standard of the franchisor's goods or services. The franchisor provides the technical assistance and the Know How to protect its mark or patent so as to ensure uniformity in quality. Therefore, a franchisor shares its business model with all relevant details so that the franchisee can use the patent, logo or mark of the franchisor and maintain the standard, style, quality and look of the product or services provided, as if it is given by the franchisor itself. The franchisor must grant the franchisee the right to use its patent or mark or logo, that is its intellectual property, to the extent necessary to operate the franchisee business. In addition to this the franchisor also provides the assistance and Know How in support of the business and helps to solve problems along the way. Therefore, franchising is a business relationship between the parties where the franchisor services and facilitates the business of the franchisee within defined parameters.

7.The Agreement between the Petitioner and Honda Japan is a license technical assistance agreement. The Petitioner under this agreement is granted a license by the franchisor to assemble, manufacture and sell automobiles in terms of the specific models and types listed in Exhibit I of the Agreement by using the patent and design of Honda Japan, the licensor. In terms of Article 1 of the Agreement, the licensor will provide the Petitioner/licensee all secret and technical information, data, formulae, designs, drawing, standards, specifications, technical records, material lists, processing etc., which are necessary for the manufacture, testing, inspection, sale, maintenance, repair and service of the automobiles. The Know How is also necessary for the construction and operation of the plant which will manufacture the automobiles. This technical assistance and Know How provided by Honda Japan is for the purposes of setting up a plant and its manufacturing facilities as and when desired by the Petitioner/licensee. In terms of Article 3 the Petitioner also receives technical guidance and technical training from the licensor as and when required. As per Article 12 of the Agreement, in consideration for the technical assistance and Know How and use of the patent, the Petitioner pays a license fee and a royalty to the Honda Japan. The Petitioner is therefore, provided the business model of Honda Japan to manufacture Honda automobiles. For this service the Petitioner pays a fee to Honda Japan. The nature of the relationship between the Petitioner and Honda Japan is governed by the Agreement. The Petitioner runs its own business in accordance with, Honda Japan's model. The Petitioner essentially purchases a business package from Honda Japan which entails the provisions of services aimed at guaranteeing a uniform operation and style of the product. In this package Honda Japan services the business of the Petitioner by providing it the use of its intellectual property rights, technical assistance and Know How for manufacturing and sale of Honda automobiles. For the services rendered the Petitioner pays a fee and also pays royalty. The Petitioner is given the specifications of the automobiles which have to be manufactured in Pakistan under the Agreement along with Know How and technical assistance, guidance and training as and when it is required. These are all in the form of services provided by Honda Japan to the Petitioner for the consideration stipulated in Article 12 of the Agreement. The fact that the technical assistance and Know How is the proprietary right of Honda Japan does not mean or suggest that it is not a service provided by Honda Japan. Also the fact that the Petitioner manufactures the automobiles does not take the ambit of the Agreement out of franchise services as the Petitioner manufactures and sell automobiles in Pakistan and also provides after sale services to its customers. The franchise services provided by Honda Japan are for manufacture, sale and all related services provided by the Petitioner. These all fall within the ambit of franchise and services under the Act. As per the Agreement Honda Japan is the owner of all technical assistance and Know How provided by it and the Petitioner merely enjoys its permission to use the same for a price agreed between the parties. The Agreement in fact provides a way of doing business to the Petitioner, which tantamount to a service provided by Honda Japan. Therefore, since this is a service provided by Honda Japan to the Petitioner which originates outside Pakistan but is rendered in Pakistan, it is liable to pay federal excise duty under Section 3 of the Act.

8.Under the circumstances no case for interference by this Court is made out. Petition dismissed.

KMZ/H-10/LPetition dismissed.