LEVY OF SALES TAX AND ADVANCE INCOME TAX ON DISPOSAL OF UNSERVICEABLE SCRAP

LEVY OF SALES TAX AND ADVANCE INCOME TAX ON DISPOSAL OF UNSERVICEABLE SCRAP <!--[if gte mso 10]> LEVY OF SALES TAX AND ADVANCE INCOME TAX ON DISPOSAL OF UNSERVICEABLE SCRAP By Mr. Javed Akhtar, Advocate, Lahore The issue of levy of sales tax on disposal of fixed assets and scrap by a company which itself is .otherwise is not a manufacturer of fixed assets or scrap, has been a historical dispute between the taxpayers and CBR. CBR was of the view that the disposal of fixed assets and scrap come within the ambit of taxable supply as had been defined in the Sales Tax Act, 1990, therefore, it attracts levy of sales tax. The legal experts held a different view. In their opinion, disposal of fixed assets and scrap does not come within the definition of supply as has been defined in the Act, hence does not attract levy of sales tax. Their opinion was based on the following grounds: That the Company itself is not a manufacture of the vehicles and other fixed assets. That the Company itself does not conduct business of sale and purchase of vehicles and other fixed assets and this activity is beyond his normal business activity. The disposal of fixed assets does not result into furtherance of any taxable activity. 2. C.B.R. vide its various letters sought advice from Messrs Law to the extent whether or not these supplies, sales, auctions and other transactions of goods, movable/fixed assets and scrap were exempt from sales tax. 3. Ministry of Law vide its O.M. No.633/2000-Law dated 3rd June, 2000 tendered an advice as follows: SUBJECT: LEVY OF SALES TAX ON DISPOSAL SUPPLY OF TAXABLE FIXED/MOVABLE ASSETS BY THE REGISTERED PERSONS. The undersigned is directed to refer to Central Board of Revenue's Letter No.3 (54)/STP/99, dated the 24th May, 2000, on the above subject and to state that the sale, auction or otherwise disposal of goods, movable/ fixed assets (including land, building, plant/machinery, equipment or vehicles) by a registered person shall not be chargeable to sales tax if such disposal is beyond the normal and continuous "supply" as a business activity of such person and more particularly when there was no value addition to the goods or for which the input tax was not allowed. This issues with the approval of the Draftsman/Additional Secretary. (Zafar Iqbal Gondal) Section Officer 4. Being not satisfied, C.B.R. requested Ministry of Law to make a review of its advice dated 3-6-2000. 5. Ministry of Law vide its O.M. dated 9-8-2000 enclosed the comments of the Ministry wherein the earlier views were reiterated. 6. That apparently not satisfied with the above advice by the Ministry of Law, CBR again sought its review. Mr. Sarfraz Ahmed Khan, Member Sales vide C.No. 3(54) STP/99, dated 1st December, 2000 requested Mr. Justice Faqir Muhammad Khokhar, the then Secretary, Law Division, Islamabad that the advice of the Law Division contained in its earlier letters may kindly be reviewed. The request was declined by Ministry of Law in its letter dated 16-1-2001. 7. The Appellate Tribunal (Customs, Central Excises and Sales Tax), Karachi Bench, Karachi in its judgment in Sales Tax Appeal No. K-193 of 2000 dated 27-10-2000 titled Messrs Novartis (Pakistan) Limited v. Collector Sales Tax held the levy of sales tax on disposal of vehicles and other fixed assets as illegal and void. The honourable Tribunal while accepting the appeal has relied on a judgment of Indian Supreme Court reported as (1967) 19 STC 1 (SC). The relevant portion of the said judgment is reproduced hereunder: "In disposing of miscellaneous old and discarded items such as stores, machinery, iron scrap, cans, boxes, cotton ropes, rags etc, the Company was carrying on business of selling those items of goods. These sales were frequent and the volume was large, but it cannot be presumed that when the goods were acquired there was an intention to carry on the business in those discarded materials; not are the discarded goods by products or subsidiary products of or arising in the course of the manufacturing process. They are either fixed assets of the Company or are goods which are identical to the acquisition or use of stores or commodities consumed in the factory. Those goods are sold by the company for a price which goes into the profit and loss account of the business and may indirectly be said to reduce the cost of production of the principal item, but on that account disposal of those goods cannot be said to become part of or an incident of the main business of selling textiles. In order that receipts from sale of a commodity may be included in the taxable turnover, it must be established that the assessee was carrying on business in that particular commodity." 8. Being aggrieved, Collector of Central Excise and Sales Tax, Karachi filed an appeal in Sindh High Court, Karachi against the judgment of Appellate Tribunal, Karachi Bench in case of Messrs Novartis Pakistan Ltd. In terms of section 47 of the Act, an appeal shall lie to the High Court in respect to any question of law arising out of an order of the Appellate Tribunal. The questions of law which were framed by the Collectorate were as follows: (a) Whether the fixed assets fall within the ambit/definition of goods as envisaged under section 2(12) of the Sales Tax Act, 1990? (b) Whether the disposal of fixed assets as sold by the respondent No.1 (Messrs Norvartis Pakistan Ltd.), falls within the ambit/definition of taxable activity as provided under section 2(35) of the Sales Tax Act, 1990? 9. The Honourable High Court of Sindh in SPL Sales Tax Appeal No. 62 of 2001 titled Collector of Customs, Central Excise and Sales Tax v. Novartis Pakistan Ltd., while dismissing the appeal has upheld the decision of the Appellate Tribunal and has held the questions of law regarding levy of sales tax on fixed assets are answered in negative i.e. there can be no sales tax on the disposal of fixed assets. 10. However, in order to nullify the ratio laid down by Sindh High Court in its judgment referred to above, the term "supply" as has been defined in clause (33) of section 2 has been amended and the words "in furtherance of business" have been omitted in the definition of term "supply". The argument placed before the High Court and other judicial and quasi-judicial forums is no more available and the disposal of fixed asset has become a taxable supply within the meaning of the Sales Tax Act. However, a corresponding amendment has been made in the Sixth Schedule to the Act, where a new Sr. No. 60 has been added which grants exemption on supply of such fixed assets against which input tax adjustment is not available under a notification issued in terms of clause (b) of section 8(1) of the Act. So disposal of vehicles and other fixed assets notified by the Federal Government in S.R.O. 578(I)/98 dated 12-6-1998 will be exempt from sales tax. 11. WAPDA has made a representation to Central Board of Revenue asking a question whether or not the supply of scrap or unserviceable materials is exempt under Sr. No. 60 of the Sixth Schedule to the Act of 1990. Vide its Letter C. No. 3(54)STP/99 dated 28-1-2004 has ruled that vide Sr. No. 60 of the Sixth Schedule to the Act of 1990 the exemption does not extend to supply of scrap or unserviceable material because these cannot be classified as fixed assets.