2007 PLP (Trib (PTD)

MUMTAZ HAIDER RIZVI (MEMBER TECHNICAL).

This appeal is an outcome of the Hon'ble Peshawar High Court, Peshawar's order dated 12-4-2006 in S.A.O. No.65 of 2001, whereby the case has been remanded to this Tribunal for decision afresh.

2. In its first orders, the Customs, Central Excise and Sales Tax Appellate Tribunal, Peshawar Bench vide its judgment dated 26-5-2001 had allowed the appeal of Messrs Pakistan Tobacco Company Limited ("PTC") (hereinafter called as the appellants) against Order-in-Original No.33 of 1999, whereby adjustment of input tax paid on account of "Machinery Spares" and a "Fork Lift Truck" was allowed and it was ruled that negative terms of S.R.O. 1307(I)/97 dated 20-12-1997 have to be ignored being in conflict with the substantive provisions of the Sales Tax Act, 1990 (hereinafter termed as the Act).

3. The Department assailed the said order of the Tribunal before the Hon'ble Peshawar High Court, Peshawar on the ground that input tax adjustment in relation to sales tax paid on machinery spare parts and a fork lift truck was not permissible in terms of S.R.O. 1307(I)/97 dated 20-12-1997. The said S.R.O. was issued under section 8(1)(b) of the Act and it, inter alia, permitted only such .adjustments, which are made in relation to goods, which form integral part of the taxable supply i.e. raw materials consumed in making of the taxable goods. The Hon'ble Peshawar High Court, Peshawar accepted the appeal and issued directions to the Tribunal to decide the matter afresh in the light of the Hon'ble High Court's earlier judgment passed in S.A.Os. Nos.32 and 34 of 202 thereby giving its express findings as to entitlement ofadjustment of input tax paid in relation to items involved keeping in view the provisions of section 7 read with section 8(1)(a) of the Act.

4. The case has been re-examined accordingly. It is observed that the appellants had claimed adjustment with regard to input tax paid on `machinery spare parts' and a `fork lift truck'. Section 7, read with section 8 of the Act, allows a registered person to adjust any input tax paid on goods used for the purpose of making a taxable supply clause (b) of subsection (1) of section 8 of the Act under which S.R.O.. 1307(I)/97 was issued provides that the Federal Government may specify through a notification `any other goods' in respect of which said adjustment would not be permissible.

5. We have come across quite a few rulings of the superior courts on the legal issue, involved in this case. The Hon'ble Lahore High Court, Lahore in a case reported as 2002 PTD 2959 held that the words, `any other goods' appearing in clause (b) of subsection (1) of section 8 of the Act refer to any goods other than those meant for use in making a taxable supply adjustment of which is allowed by clause (a) of the said provision of the Act. In the said case adjustment of input tax paid on `diesel' utilized for running the industrial plant was allowed though it was specifically disallowed under the express terms of S.R.O. 578(I)/98 dated 12-6-1998 (issued in supersession of S.R.O. 1307(I)/97). In the said S.R.O. goods (explicitly) including the POL products (other than furnace oil, lubricants and greases) were mentioned in relation to which input tax adjustment was disallowed.

6. The underlying principle under .which the Hon'ble Lahore High Court, Lahore accepted various writ petitions was that a reading of section 7(1), in juxtaposition to entitle to section 8(1)(a) of the Act, leads to the conclusion that a registered person shall be entitled to deduct input tax in the manner specified in section 7(1) paid on the goods used or to be used for any purpose for the manufacture or production of taxable goods or for taxable goods or for taxable .supplies made or to be made by him. The Hon'ble High Court while following the dictum of the Hon'ble Supreme Court of Pakistan in the case (titled Central Board of Revenue v: Sheikh Spinning Mills Limited reported as 1999 PTD 2174) held that the express provisions of substantive law cannot be nullified by the Federal Government by means of a notification which by all means is a sub-legislative measure.

7. The question of admissibility of input tax paid on machinery spares has also been considered by the Supreme Court of Pakistan in the case titled (Attock Cement Pakistan Limited v. Collector of Customs & Central Excise Quetta) reported as 1999 PTD 1892 (para.9 at 1899) in which the apex Court held that the accessories and parts, which are required by the appellant for efficient and smooth running of its plant or its upkeep and maintenance fall within the definition of "goods" and the appellants are entitled to deduct the input tax in relation to same from the output tax liability.

8. The Karachi Bench of the learned Customs, C.E. & Sales Tax Appellate Tribunal in the case (titled Sindh Alkalis Limited and 6 others) reported as 2002 PTD (Trib.) 475 after reviewing all S.R.Os. issued on the instant subject during the years 1990-1997 held that under the substantive provisions of the Act adjustment of input tax paid on machinery spares could not be disallowed by the Sales Tax Department Similar view was taken by the Peshawar Bench of the learned Tribunal in the case (titled Dhan Fibres Limited) as reported 2003 PTD Journal 12 wherein directions were given to the Sales Tax Department to allow input tax credit in relation to industrial lubricants and spare parts, if same were utilized wholly for making taxable supplies despite the fact that these were acquired during the currency of S.R.O. 1307(I)/97 and did not constitute integral part of the end product. The Collector Sales Tax Peshawar assailed the said decision of the Tribunal by filing an Appeal before the Peshawar High Court, Peshawar which was also dismissed vide judgment dated 5-5-2005 reported as 2005 PTD 2012.

9. As regards, question of admissibility of adjustment in relation to input tax paid on `fork lift truck' it is suffice to hold that the requirement of use of any item directly in the process of production before claiming input tax adjustment against output tax is nowhere spelled out expressly or by implication if we look into the scheme of the Act and read its provisions as a whole. The question of admissibility of input tax paid by PTC on "Electronic Time Recorders" and "Fire Fighting Equipment" case up for consideration of Customs, CE & Sales Tax Tribunal Peshawar in Appeal No. ST.126/PB of 2002 and Appeal No. ST.791 /PB of 2002 decided on 29-3-2005 and it was held that PTC was entitled to claim input tax adjustment on both items despite the fact that both do not directly contribute in the production of taxable supply (cigarettes).

10. An arguably accepted principle (considered as such by increasing number of learned Judges) seems to be emerging to the effect that an item may not have directly contributed in the production of a taxable supply but if it is indirectly relatable to production process or is a normal accessory in the industrial activity in question then input tax paid on such an item is adjustable against the output tax. On similar analogy, the Hon'ble Lahore High Court, Lahore in a case (titled Messrs Mayfair Spinning Mills Limited v. Customs, Central Excise and Sales Tax Appellate Tribunal and 2 others) reported as PTCL 2002 CL 115 has held that input tax paid by a registered person goes to national exchequer as input tax, it is a trust till the time it is adjusted or refunded. The Hon'ble High Court has gone further ahead in accepting the appeal and allowing the registered, person to claim refund of all input tax even if there was no output tax liability as all the goods on which he had paid input tax had been destroyed by fire.

11. We have further observed that the Federal, Government, in order to give effect to judgments of various fora (whereby, under purposive approach, a liberal interpretation was, given to the provisions of section 8 of the Act) amended S.R.O. 578(I)/98 time and again during the years 1999-2003 and ultimately rescinded it. The new S.R.O. 490(I)/2002 dated. 12-6-2004 reduced the negative list from eleven (11) items to just three (3) namely vehicles (Chapter 87), rood/beverages/garments and gifts. The said shortlisting was understandably done, by the Federal Government to broaden the scope of input tax adjustment thereby giving full play to the provisions pf section 8(1)(a) of the Act under which input tax adjustment is permissible in relation to any item used or to be used for purpose of making a taxable supply.

12. In this view of the matter we can safely deduce that once a registered person establishes that the goods in question on which input tax has been paid were used or to be used directly or indirectly for the purpose of manufacture or production of taxable goods or for taxable supplies made or to be made by him, then he becomes entitled to the deduction of the said input tax paid by him for the said purpose from the output tax that is due from him in respect of a particular tax period and if no output tax is due then he is entitled to refund of input tax. In the instant case, adjustment of input tax in relation to Fork-lift Truck is lawful being an item used for purposes of making taxable supplies and not listed in any notification ever issued under section 8(1)(b) of the Act. Fork-lift Trucks are special purpose vehicles used for lifting the manufactured goods right from the production hall to the factory warehouse and are classified under Chapter 84 of the First. Schedule to the Customs. Act, 1969 and not under Chapter 87 ibid, vehicles of which were not eligible for input tax adjustment (being ordinary passenger & goods transport vehicles) under S.R.O. 578(I)/98 dated 12-6-1998.

13. It is therefore, held that the input adjustment claimed by PTC on `machinery spare parts' and `fork lift truck' is lawful in terms of the provisions of section 7 read with section 8(1)(a) of the Act and the Order-in-Original No.33 of 1999 is set aside and instant appeal is allowed, accordingly.

14. Announced. C.M.A./85/Tax(Trib.) Order accordingly.