REBATE IS NOT “PAYMENT” FOR WITHHOLDING TAX

Supreme Court Clarifies Scope of Section 153 – Key Tax Law Precedent

Case Reference

2026 SCMR 130
Supreme Court of Pakistan

Case Title: Commissioner Inland Revenue, Lahore v. Messrs Coca Cola Pakistan Limited, Lahore
Petition: C.P.L.A. No. 2845-L of 2022
Decision Date: 3 October 2025

Bench:

• Munib Akhtar

• Muhammad Shafi Siddiqui

• Miangul Hassan Aurangzeb

Appeal From: Judgment dated 16.06.2022 passed by the Lahore High Court in P.T.R. No. 349 of 2010.

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

Legal Analysis by Osmani Legal Firms Islamabad

1. Rebate for Exclusive Sale vs. Advertising Services

The dispute arose when Coca Cola Pakistan Limited allowed a rebate to a distributor/customer in consideration of ensuring exclusive sale of its products.

The tax authorities attempted to characterize this rebate as consideration for advertising services, thereby seeking deduction of withholding tax under Section 153(1)(b) of the Income Tax Ordinance, 2001.

2. Core Legal Issue Before the Supreme Court

The central legal question before the Supreme Court of Pakistan was:

Whether a rebate or discount recorded through accounting adjustments — without transfer of funds — can be treated as “payment” for the purpose of withholding tax under Section 153.

3. Actual Payment Is Essential for Withholding Tax

The Supreme Court categorically held that Section 153 applies only when an actual payment is made by the taxpayer to another person.

The Court emphasized that:

• Withholding tax liability arises only upon actual payment.

• A mere accounting adjustment, rebate, or discount does not constitute payment.

4. Notional Accounting Adjustments Are Outside Section 153

In the present case:

• No money was transferred from Coca Cola Pakistan Limited to its customer.

• The rebate existed only as a book entry or accounting adjustment.

Because there was no real payment, the Court held that Section 153 could not be invoked.

5. Tax Department’s Case Failed at the Threshold

The Court observed that the department’s argument collapsed at the very outset.

Once it was established that no payment had been made, the following issues became irrelevant:

• Whether the rebate was for advertising services

• Whether it could be treated as royalty or commission

• Whether withholding tax should apply

6. Strict Interpretation of Withholding Tax Provisions

The Court further held that provisions relating to advance tax deduction, such as Section 153, must be strictly interpreted because they carry serious penal consequences.

Failure to deduct withholding tax can result in:

• Personal liability of the taxpayer

• Being treated as taxpayer in default under Sections 161 & 163

Therefore, the law cannot be expanded by implication or broad interpretation.

7. Section 153 Treated as Quasi-Charging Provision

Due to the consequences of default, the Supreme Court considered Section 153 analogous to a charging provision.

The Court reiterated:

• Tax obligations cannot be created by inference

• The statutory requirements must be strictly fulfilled

8. Fictional or Artificial Payments Cannot Create Tax Liability

The Court rejected the department’s attempt to rely on a fictional payment theory.

The judgment clarifies that:

• Tax liability must be based on real transactions

• Artificial characterization cannot create withholding obligations

Key Legal Principles Established

The judgment establishes several important tax law principles:

• Actual payment is mandatory for withholding tax under Section 153.

• Rebates and discounts through accounting entries are not “payments.”

• Withholding tax provisions must be interpreted strictly.

• A taxpayer cannot be treated as a defaulter unless statutory conditions are fully satisfied.

• Notional or fictional payments cannot create tax liability.

Summary of the Supreme Court Judgment

The Supreme Court of Pakistan dismissed the Civil Petition for Leave to Appeal filed by the Commissioner Inland Revenue and upheld the judgment of the Lahore High Court.

The Court ruled that:

• The rebate allowed by Coca Cola Pakistan Limited for exclusive sale of products did not constitute payment under Section 153(1)(b) of the Income Tax Ordinance, 2001.

• Since the rebate was only an accounting adjustment and no funds were transferred, withholding tax provisions were inapplicable.

The Court emphasized that advance tax deduction provisions must be strictly construed, and the department’s claim was therefore legally unsustainable from the outset.

✅ Legal Insight by:
Osmani Legal Firms
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