ADJUSTMENT OF INPUT TAX ON SPARE PARTS AND LUBRICANTS DURING THE CURRENCY OF S.R.O. 1307(I)/97, DATED 20-12-1997

ADJUSTMENT OF INPUT TAX ON SPARE PARTS AND LUBRICANTS DURING THE CURRENCY OF S <!--[if gte mso 10]> ADJUSTMENT OF INPUT TAX ON SPARE PARTS AND LUBRICANTS DURING THE CURRENCY OF S.R.O. 1307(I)/97, DATED 20-12-1997 By Akhtar Javed, Advocate, Lahore Section 7 of the Sales Tax Act, 1990 entitles a registered person to deduct input tax paid during the tax period for the purpose of taxable supplies made, or to be made, by him from the output tax that is due from him in respect of that tax period. 2. Section 8 of the Act disallows a registered person to deduct input tax paid on: (a) the goods used or to be used for any purpose other than for the manufacture or production of taxable good or for taxable supplies made or to be made by him; (b) any other goods which the Federal Government may, by a notification in the official Gazette, specify. 3. In exercise of powers conferred under clause (b) of section 8(1) of the Sales Tax Act, 1990, the Federal Government issued S.R.O. 1307(I)/97 dated 20-12-1997 wherein it was notified that a registered person shall not be entitled to reclaim or deduct the input tax paid on goods which were not direct constituent and integral part of the taxable goods produced, manufactured or supplied, during the course, or in the furtherance, of any taxable activity. The aforesaid notification remained operative till 30-6-1998. 4. During the currency of Notification S.R.O. 1307(I)/97, the Sales Tax Authorities did not allow adjustment of input tax paid on goods including spare parts and lubricants on the grounds that under S.R.O. 1307(I)/97 dated 19-12-1997, adjustment of input tax was admissible only on those goods which were integral parts and direct constituents of taxable supplies and as the spare parts and lubricants were neither direct constituents nor integral part of taxable supplies, therefore, the adjustment of input tax on these goods was not admissible in view of S.R.O. 1307(I)/97. 5. The Honourable Lahore High Court, Lahore its judgment in Writ Petition No. 9272 of 1998 held that in a notification issued in exercise of powers conferred under section 8(1)(b) of the Sales Tax Act, 1990, the Federal Government is required to specify the goods on which adjustment of input tax will not be admissible. Since goods were not specified in S.R.O. 1307(I)/97, the same was held ultra vires the provisions of the Act. It was further held by the Honourable High Court that during the period from 12/97 to 6/98, the adjustment of input tax will not be allowed only on those goods specified in the Notification S.R.O. 556(I)/96 dated 1-7-1996 which was operative before the issuance of S.R.O. 1307(I)/97. 6. Being aggrieved, C.B.R. filed an appeal before the Supreme Court of Pakistan. The apex Court in its judgment titled "Sheikh Spinning Mills Ltd. (1999 PTD 2174) directed the registered persons to approach the departmental forums provided under the Sales Tax Act, who would decide the controversy at issue with reference to substantive provisions of the Act and S.R.O. 1307(I)/97 dated 20-12-1997. The Court further held that in case of any conflict between the two, the substantive provisions of the Act will prevail. 7. In the light of directions of the Supreme Court of Pakistan contained in its above referred judgments, the registered persons approached the departmental authority. The various Adjudicating Officer passed orders wherein adjustment/refund of input tax paid on spare parts and lubricants was disallowed on the grounds that the said item were neither direct constituents nor integral part of the taxable goods produced. The Sales Tax Officers did not accept the plea that S.R.O. 1307(I)/97 dated 20-12-1997 was in conflict with the provisions of section 8(1)(b) of the Act. 8. The Appellate Tribunal Lahore Bench-II, in Sales Tax Appeal No. ST/2480 of 2000 rejected the appeal of Messrs Sitara Spinning Mills Ltd., Faisalabad holding that lubricants and spare parts did not form direct constituents and integral part of the taxable goods produced by the company i.e. yarn and therefore, input tax credit was not admissible in terms of .S.R.O. 1307(I)/97. The learned Tribunal further held that the aforesaid notification was not in conflict with the provisions of the Act as the goods on which adjustment of input tax was to be disallowed were very much specified in the said notification. In the opinion of the learned Tribunal, the notification specified "goods which are not direct constituents and integral parts of the taxable goods produced" to be the goods on which the adjustment of input tax was not allowed. 9. An identical case came before the Appellate Tribunal Peshawar Bench wherein Messrs Dhan Fibres Limited, Hattar Industrial Estate, had filed an appeal against the orders of Collector (Appeals), Northern Zone, Rawalpindi wherein the learned Collector (Appeals) had refused to allow adjustment of input tax purchased during the currency of S.R.O. 1307(I)/97. 10. Being aggrieved, the company had filed in the Appellate Tribunal. Mr. S. M. Kazimi, the learned Member (Technical) of Peshawar Bench who has authored the judgment in the aforesaid appeal has set aside the impugned order and has directed that input tax credit on industrial lubricants and spare parts for plant and machinery may be allowed to the appellants, 'if they utilized it wholly for making taxable supplies despite the fact that these were required during the currency of S.R.O. 1307(I)/97. The operative para. of the aforesaid judgment is reproduced below: "A perusal of the aforesaid provisions of section 8(1) will show that these provisions are expressed in negative terms i.e. showing situations where a registered person shall not be entitled to reclaim or deduct input tax which was otherwise allowed (in positive terms) under subsection (1) of section 7 subject to the conditions specified in. subsection (2) of the said section 7. In other words, we may say that provisions of section 8 are exceptions to the provisions of admissibility of input tax credit otherwise allowed under section Again we find that clause (b) of subsection (1) of section 8 uses the word `any other goods' as compared to the usage of words `the goods' and 'on the goods' (the word 'on' being not necessary here) in clauses (a) and (c), respectively, clause (c) having been added later, through the Finance Act, 1999. The usage of the word `other' in the said clause (b) is significant and denotes a relation to clause (a) preceding it meaning thereby any goods other than those covered by clause (a). Had it not been the case, either the word `other' should not have been used in the said clause (b) or the provisions of the said clause (b) should have instead been written as a proviso of the said clause (a). However, it is not so and instead clause (b) uses the words `any other goods' (instead of 'any goods' or `the goods') and follows clause (a) in sequence. Notification No. S.R.O. 1307(I)/97 dated 20-12-1997 was made under clause (b) of section 8(1) of the Sales Tax Act, 1990 and has to be read as a part of it. However, plants and machinery and the spare parts and necessary lubricants for the maintenance and operation of such plant and machinery are no doubt the goods for the production, manufacture and supply of taxable goods by using such a plant and machinery. The second proviso to section 10(1) of the Act even provides for input tax credit/refund in situation where the registered person is not yet making taxable supplies at the time of delivery of such components and spare parts. In the face of such a provision, how one can conceive that spare parts for operation and maintenance of plant and machinery of a working unit making taxable supplies can be disallowed under section 7 or under section 8 of the Act. Similar is the case of lubricants for the maintenance and operation' of plant and machinery of registered persons making taxable supplies. We have no doubt that input tax credit on acquisition of taxable spare parts and taxable lubricants are admissible under section 7(1) of the Act subject to the conditions specified in subsection (2) thereof. Again, such spare parts and lubricants, .if required and used for the maintenance and operation of plant and machinery of a registered person making taxable supplies is also not disallowed under statutory provisions of clause (a) of section 8(1) of the Act. Under these circumstances reference to clause (b) or to Notification No. S.R.O. 1307(I)/97 dated 20-12-1997, issued thereunder is not necessary because the said notification does not cancel, negate or override the provisions of clause (a) of section 8(1) of the Sales Tax Act, 1990 and also cannot be referred to for the purposes of determining inadmissibility of input tax credit on industrial lubricants and spare parts for plant and machinery which are already held to be goods used or to be used for making taxable supplies. We, therefore, set aside the impugned order and direct that input tax credit on industrial lubricants and spare parts for plants and machinery may be allowed to the appellants if they utilized it wholly for making taxable supplies despite the fact that these were acquired during the currency of Notification No. S.R.O. 1307(I)/97 dated 20-12-1997. The appeal stands disposed of accordingly as accepted in the aforesaid terms of this judgment."