2003 PLP (Trib (PTD)

2. Briefly, the facts of the case are that during the Special Audit of the record of Messrs Khazana Sugar Mills (Pvt.) Ltd., Messrs Yousaf Adil Saleem & Co., Chartered Accountant and a Special Auditor appointed under section 32A of the Sales Tax Act, 1990, reported that Messrs Khazana Sugar Mills (Pvt.) Ltd:‑‑‑ (a) made taxable supplies of Rs.54,550 during tax period November, 1999, but the sales tax was deposited in the tax return for December, 1999 in breach of sections 3 and 6 of the Act making themselves liable to additional tax of Rs.475 and penalty of Rs.10,000; (b) had not deposited an amount of Rs.5,750,868 being sales tax on 58983.26 tonnes of baggase valued at Rs.38,339,119 consumed in house without payment of sales tax; (c) had claimed input tax credit involving sales tax of Rs.86,798 during the tax period 09/99 for which no sales tax invoice was provided before the Special Auditors during the audit; (d) had charged and levied sales tax of Rs.13,537 on the supplies of scrap worth Rs.75,203 but the said tax amount was not shown as deposited in the tax return; and (e) had not maintained Input Register for the tax period October, 1999 to June, 2000 in breach of section 22 of the Central Excises' Act, 1944, read with the Sales Tax Act, 1990:

3. The learned Additional Collector (Adjudication) accordingly issued notice requiring Messrs Khazana Sugar Mills (Pvt.) Ltd. to show -cause why the aforesaid amount of sales tax total Rs.5,851,678 alongwith the additional tax due thereon, should not be recovered from them besides taking penal action, for the breach of sections 3, 6, 22. 23, 26, read with sections 11, 33, 34 and 36 of the Sales Tax Act, 1990. After hearing the mills and the Department, the learned Additional Collector (Adjudication) found the offence alleged in sub‑paras. (a), (c) and (d) of the preceding paragraph to be established as Messrs Khazana Sugar Mills (Pvt.) Ltd., have deposited the dues involved in this regard and do not contest these charges. However, he found the allegation relating to (b) of paragraph 2, which was keenly contested by the Mills to be established because baggase are not partly manufactured goods and therefore, its in‑house consumption is not covered by the exemption under item No.43 of the Sixth Schedule to the Sales Tax Act, 1990. The learned Additional Collector (Adjudication), therefore, passed the impugned order determining that an amount of Rs.6,902,712 (Later corrected as Rs.5,750,868 vide Corrigendum No. ST (Adj) Addl: C/7/2002/2206, dated 28‑9‑2002), alongwith the additional tax due thereon under section 34, was payable by the party. He also imposed penalty equal to 3 % of the value of the sales tax in terms of Hence this appeal.

4. During the course of hearing before us the learned counsel or the appellant argued that the impugned order is based on a misreading and incorrect appreciation of the exemption contained at item No.43 of the Sixth Schedule to the Sales Tax Act, 1990. He drew attention to Board's C. No. 1/73‑STT/96, dated 15‑10‑1999 which stated that baggase used in the same factory is exempt from sales tax under item No.43 of the Sixth Schedule to the Sales Tax Act, 1990: In reply to a query, he confirmed that the demand does not relate to a period when sugar was exempt and rather it relates to a period when sugar was also made sales taxable and the sales taxable baggase produced in a sugar factory, was used in‑house in the furnace of the mills. He prayed for the setting aside of the impugned order.

5. The learned Law Officer and Cost Accountant from the Collectorate argued that the baggase are bye‑products or fully manufactured sales taxable goods and cannot manufactured goods as these are independently marketable. He claimed that the in‑house use of baggase‑‑‑as fuel in sugar factories are not entitled to the exemption under Serial No.43 of the Sixth Schedule to the Act. In reply to a question whether in‑house consumption of natural gas for manufacture of sales taxable fertilizers or in‑house consumption of self‑generated electricity for the productions of sales taxable goods shall qualify for exemption under Serial No.43 of the Sixth Schedule to the Act, the learned Law Officer and Cost Accountant had no answer. They, however, concluded that in‑hou4e consumption of baggase as fuel in sugar factories is not covered by the exemption at Serial No. 43 of the Sixth Schedule to the Sales Tax Act, 1990.

6. Having heard the parties and on perusal of record of the case, we find that Serial No. 43 (old Serial, 34 before the Finance Act, 1998) of the Sixth Schedule provides exemption from sales tax on "Partly manufactured goods if used within the same factory to manufacture goods in respect of which sales tax is leviable on their supply". Every' goods,' until exhausted through consumption, is a partly manufactured goods if it is capable of being used in the production of any other goods. The intention of the said Serial No.43 of the Sixth Schedule is to avoid the cascading effect of the tax, which is a, cardinal principle of sales taxation in VAT‑mode. The sales tax paid on every sales taxable input, except those prescribed under section 8 of the Sales Tax Act, 1990, procured by a registered person from outside for production of a sales taxable output is adjusted in the output tax or refunded in the prescribed manner with a view to avoiding the cascading effect of the tax. Similarly, the in‑hoc production of sales taxable goods, used as inputs, are not charged to sales tax when consumed in‑house for the manufacture of sales taxable outputs leading to eventual taxable supplies of such outputs and for this objective the provisions of Sr. No.43 of the Sixth Schedule to the Act operate. When sugar became sales taxable in 1998, the in‑house consumption of sales taxable baggase for the manufacture of sales taxable sugar became exempt under the said general exemption clause of Serial No.43 of the Sixth Schedule and the specific exemption on baggase (as was available at Serial 49 of the Old Sixth Schedule dating prior to the Finance Act, 1998) was not required any further. The F clarification, as given 'in C.B.R.'s Letter C. No. 1/73‑STT/96, dated 15‑10‑1999 is correct in law and is confirmed. As a result, the impugned order (only to the extent that it relates to levy and demand of sales tax on baggase use in‑house as fuel in the manufacture of sales taxable sugar) is set aside and the appeal in this regard is disposed of as accepted.

7. Inform all concerned.

8. Announced. C.M.A./602/Tax (Trib.) Appeal accepted.