ADJUSTMENT OF INPUT TAX PAID ON BAGGASSE AGAINST OUTPUT TAX PAID ON MOLASSES AND PRESS MUD-----SUPREME COURT REFERS THE PETITIONER SUGAR MILLS TO THE SALES TAX AUTHORITIES

ADJUSTMENT OF INPUT TAX PAID ON BAGGASSE AGAINST OUTPUT TAX PAID ON MOLASSES AND PRESS MUD-----SUPREME COURT REFERS <!--[if gte mso 10]> ADJUSTMENT OF INPUT TAX PAID ON BAGGASSE AGAINST OUTPUT TAX PAID ON MOLASSES AND PRESS MUD-----SUPREME COURT REFERS THE PETITIONER SUGAR MILLS TO THE SALES TAX AUTHORITIES By Mr. Akhtar Javed, Advocate, Lahore Supply of sugar was exempt till 1-4-1998 by virtue of entry at serial number 5 in the Sixth Schedule as it existed on the statute book in the year 1998. Through Sales Tax (Amendment) Ordinance 1998, the serial number 5 was omitted from Sixth Schedule and cane sugar and beet sugar became liable to tax. During the period when the supply of sugar was exempt from sales tax, the sugar mills were registered with sales tax as these were paying sales tax on supplies of molasses and press mud. The sales tax department had made out a number of cases against various sugar mills wherein it was alleged that during the said period when sugar was exempt these mills were required to pay sales tax on baggasse which had been used by these mills in their boilers as fuel. In view of entry at serial number 34 of the Sixth Schedule to the Act, only such partly manufactured goods were exempt from sales tax which were used in the same factory for the manufacture of taxable goods. As per the case of the department; since baggasse had been used for the manufacture of exempt sugar, it was liable to sales tax. 2. Messrs Ashraf Sugar Mills Bahawalpur filed a Writ Petition No.2027 of 1998 in Lahore High Court Lahore. Mr. Imtiaz Rashid Siddiqui, Advocate contended that as Bagasse was being consumed by the petitioners themselves and there was no sale by the petitioners to any third person, the petitioners were not liable to pay any sales tax. The counsel elaborated that under the charging section viz., section 3 of the Sales Tax Act, 1990, tax was payable only when "taxable activity" occurred which in turn had been defined in section 2(35) to mean the supply of goods by one person to another. According to Mr. Siddiqui, as there was no second or third person involved to whom goods were sold, the self-consumption of Baggasse did not constitute a taxable supply. Hence there was no liability to pay the sales tax. 3. The Honorable High Court did not accept the contention of the counsel and while dismissing the petition, it was held that: The contention raised by Mr. Imtiaz R. Siddiqui, Advocate that the self-consumption is not taxable, cannot be accepted. Reference to section 2(35) shows that taxable supply not only includes sale by one person to another but also sales, manufacture, and production of any goods. The word "manufacture" has been defined in section 2(16) and clearly covers production of bagasse. Consequently, even if the self-consumption is not coveted by the earlier part of the definition of taxable supply yet it would clearly fall within the ambit of "Manufacture" as mentioned in the extended definition. For the same reason, the contention raised by Mr. Ali Sibtain Fazil, Advocate cannot be accepted. Whatever, be the definition of word `supply' is given in the Sales Tax Act, the fact remains that under section 3 of the Act it is the taxable supply which is being taxed which has been separately defined in section 2(41). So that as it may, the tax on the sales of goods is clearly covered by item No. 59 it cannot be successfully contended that by levying tax on the manufacture of goods whether for self-consumption or not, the Legislature has out-stepped its limits. 4. Being aggrieved the sugar mills filed appeals in the Supreme Court. The apex Court decided the issue in its judgment titled "Sheikhoo Sugar Mills Ltd. and others v. The Government of Pakistan and others" reported at 2001 PTD 2097. While dismissing the appeals, it was held by the Supreme Court. Thus for the foregoing reasons we are inclined to hold that Baggasse is an intermediary produce which is manufactured/produced during the process of extrusion of sugarcane to obtain juice by the appellants/petitioners being registered persons and is consumed differently and distinctly as a fuel against the value which is to be calculated at market price excluding the amount of tax if its price is not otherwise determinable. As such it being taxable supply in furtherance of taxable activity is liable to sales tax under section 3 of the Act. 5. Since the issue of levy of sales tax on baggasse used for the manufacture of exempt sugar was settled by the apex Court, the department enforced demands. The sugar mills desired that since the baggasse was used in the boilers for the manufacture of steam which was again used for the manufacture of exempt supply of sugar and taxable supplies of molasses and press mud, the amount of tax payable on baggasse was required to be apportioned in the light of provisions of section 8(2) of the Act read with Apportionment of Input Tax Rules, 1996 notified vide S.R.O. 698(I)/96 dated 22-8-1996. Since the mills has already paid sales tax on molasses and press mud without any deduction of input tax, the amount of sales tax being demanded on baggasse has to be reduced to the extent of residual input tax credit on taxable supplies of molasses and press mud. 6. Another issue also cropped up during the litigation proceedings that what would be the value of supply of baggasse for levy of sales tax. The issues came before Appellate Tribunal. The Tribunal asked CBR to fix the value of supply of baggasse after consultation with Pakistan Sugar Mills Association. C.B.R. vide S.R.O. 178(I)/2002 dated 29th March, 2002 fixed the value of supply of baggasse used, by the sugar mills as in-house fuel at Rs. 200 per tone. The Tribunal was however pleased to remit the additional tax. 7. The case again came up before Supreme Court where sugar mills had prayed for apportionment of tax on baggasse and the Government had appealed against' the order of waiver of additional tax. While disposing of 27 civil petitions, the apex Court has advised the petitioners to approach sales tax authorities for claiming adjustment/apportionment whereas the additional tax has been held recoverable at the rate fixed by C.B.R. in S.R.O. 178(I)/2002. The petitions hale been disposed of in the following terms:--‑ "1. Private petitioners shall be free to approach Sales Tax authorities for claiming adjustment of output tax being demanded from them on the bye-product i.e. `molasses' and `pressed mud' against the input tax payable on `baggasse' and if such representation is made by them, the concerned authorities shall dispose of their request independently without being influenced in any manner from any of the observations made by the sales Appellate Tribunal or from the impugned judgment of the High Court. 2. As far as the question of recovery of additional sales tax upon the `baggasse' is concerned, it would be recovered at the rate determined by S.R.O. No. 178(I)/2002 dated 29th March, 2002 for the period from which no exemption of sales tax on `baggasse' had been granted by the Federal Government."