REBATE IS NOT PAYMENT FOR WITHHOLDING TAX

Legal Analysis by Osmani Law Associates Karachi

Case Reference

2026 SCMR 130
Commissioner Inland Revenue, Lahore v. Messrs Coca Cola Pakistan Limited, Lahore
C.P.L.A. No. 2845-L of 2022
Decided on: 3 October 2025
Court: Supreme Court of Pakistan
Bench: Munib Akhtar, Muhammad Shafi Siddiqui & Miangul Hassan Aurangzeb, JJ
Appeal from: Judgment dated 16.06.2022 passed by the Lahore High Court, Lahore in P.T.R. No. 349 of 2010

Statutes Involved:

Income Tax Ordinance, 2001 — Sections 21(c), 153(1)(b), 161 & 163

Appropriate Legal Analysis

1. Rebate for Exclusive Sale vs. Payment for Advertising Services

The dispute arose from a rebate allowed by the respondent company to its customer for ensuring exclusive sale of its products. The tax department treated this rebate as consideration for advertising services, thereby seeking to apply withholding tax under section 153(1)(b) of the Income Tax Ordinance, 2001.

2. Core Legal Issue: Whether Rebate Constitutes “Payment” Under Section 153

The pivotal question before the Supreme Court was whether a rebate or discount, allowed through accounting adjustment and not involving transfer of funds, could be treated as an actual “payment” attracting withholding tax obligations.

3. Actual Payment Is a Mandatory Pre-Condition for Withholding Tax

The Court categorically held that section 153(1)(b) applies only where there is an actual payment made by the taxpayer to another person. A mere notional adjustment or rebate does not amount to “payment” for the purposes of withholding tax.

4. Notional or Book Adjustments Fall Outside Section 153

In the present case, no money moved from the taxpayer to the customer. The alleged payment was wholly notional. Since no amount was paid or credited in a manner constituting payment, section 153 was held to be entirely inapplicable.

5. Department’s Claim Failed at the Threshold

The Supreme Court observed that the department’s case failed at its inception. Once it was established that no actual payment had been made, there was no need to examine the nature of services or the characterization of the rebate as advertising or royalty.

6. Strict Interpretation of Withholding Tax Provisions

The Court emphasized that provisions relating to advance tax deduction, such as section 153, must be construed strictly because of the severe penal consequences attached to non-compliance, including personal liability under sections 161 and 163.

7. Section 153 Analogous to a Charging Provision

Due to the consequences of default—where a person becomes personally liable as a taxpayer in default—section 153 was treated as quasi-charging in nature. Such provisions cannot be expanded by implication or loose interpretation.

8. No Benefit Can Be Drawn from a Fictional Payment

The Court reiterated that tax liability cannot be imposed on the basis of legal fiction unsupported by facts. Where no payment exists in reality, withholding tax obligations cannot be artificially created.

Key Legal Principles (Ratio Decidendi)

Withholding tax under section 153 requires an actual payment.
Rebates or discounts granted through accounting entries do not constitute payments.
Advance tax deduction provisions carry penal consequences and must be strictly construed.
A person cannot be treated as a defaulter unless the statutory conditions are fully satisfied.

Summary of the Judgment

The Supreme Court dismissed the civil petition for leave to appeal and upheld the judgment of the Lahore High Court, holding that the rebate allowed by Coca Cola Pakistan Limited to its customer for exclusive sale of products did not constitute a “payment” under section 153(1)(b) of the Income Tax Ordinance, 2001. The Court ruled that withholding tax provisions apply only where an actual payment moves from the taxpayer to the recipient. Since the rebate in question was merely a notional accounting adjustment and no funds were transferred, section 153 had no application. Emphasizing the strict interpretation required for advance tax deduction provisions due to their penal consequences, the Court concluded that the department’s claim was legally unsustainable and failed at the threshold.

✅ Legal Insight by:
Osmani Law Associates
Leading Law Firm in Pakistan

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