2007 PLP (Trib (PTD)

ZAFAR IQBAL (MEMBER TECHNICAL).

This appeal challenges the vires of the order, dated 26-1-1999 passed by the Additional Collector of Sales Tax, Quetta and order, dated 24-7-1999 passed by the Collector of Customs, Sales Tax and Central Excise, Karachi, whereby a demand of tax in respect of spare parts was upheld

2. According to the records, the facts of case are that the appellant was served with a show-cause notice on 9-12-1998, wherein it was alleged that the appellant had claimed input tax adjustment in respect of a fork lifter and spare parts belonging to their unit which was not admissible, The input tax adjustment made by the appellant was declared wrong by the respondent in view of clause (a) of subsection (1) of section 8 read with S.R.O. 1053(I)/93, dated 30-10-1993, Central Board of Revenue's letter C. No. 1(4)GST-193, dated 10-7-1993 and S.R.O. 556(I)/96, dated 1-7-1996.

3. The appellant in reply to the said demand stated that the provisions of the Sales Tax Act, 1990 read with the above-quoted Notifications were not applicable in the matter. It was the appellant's view that the fork lifter and spare parts were not goods used for making exempt supply. The Notifications and Board's instructions were also not applicable as the disputed goods were imported as part and parcel of the plant and machinery. The appellant further stated that S.R.O. 556(I)/96, dated 1-7-1996 was also not attracted in the matter due to the following reasons:-- (a) the right of claim for input tax adjustment on fork lifter and spare parts accrued in 1994-96 before the issuance of the said S.R.O. i.e. 556(I)/96, dated 1-7-1996. (b) fork lifter do not come within the ambit of vehicle falling under Customs Tariff Heading 87; (c) the fork lifter is classified under Customs Tariff Heading 8428.3900; (d) the Central Board of Revenue, in a similar case also held that the fork lifter is not a vehicle.

4. The respondent No.2, who was the Adjudicating Officer in the matter did not agree with the point of view of the appellant and enforced the demand raised against him. The said order was challenged by the appellant before the respondent No.1, who accepted their plea in respect of fork lifter, however, he rejected their claim in respect of spare parts. The present appeal challenges these orders.

5. The appellant now contends:

(i) that section 8(1)(a) states that goods used or to be used for the purpose of making taxable supplies will be qualified for tax deduction. The spares of machinery are used or are to be used for the same purpose, hence the same are covered under section 8(1)(a) of the Sales Tax Act, 1990, (ii) that C.B.R.'s, letter C. No.1(4)GST-I/93, dated 10-7-1993 which was applicable before the amendment in section 10 through Finance Act, 1994-95 and after Finance Act, 1994-95 spare parts of plant and machinery were adjustable against output tax in twenty-five equal monthly instalments; (iii) that S.R.O. 556(1)/96, dated 1-7-1996 is also not applicable in this case because it relates to section 8(1)(b) of the Sales Tax Act, 1990 and till that time the appellant had taken adjustment as per section 10 of the Sales Tax Act, 1990 in twenty-five equal monthly instalments and some remaining instalments in July, 1996 as per Presidential Ordinance, 1996; (iv) that the appellant claimed input tax adjustment in respect of machinery spare parts and consumable parts during the period 1994-95 as was admissible under the provisions of sales tax law in accordance with the prescribed procedure, prevalent during that period.

6. The appellant accordingly pleads for the vacation of the impugned orders.

7. The departmental representative stated that it is an old case which was made out on a misconception and since superior forums have now decided that tax adjustment was available on spare parts, he does not press the appeal.

8. Rival parties have been heard. The sole issue involved in this case is whether or not tax paid on spares imported along with machinery will be adjustable as input tax. It would be relevant here to reproduce the provisions of subsection (1) of section 8 of the Sales Tax Act, 1990, the same are as under:-- "(8) Tax credit not allowed.

(l) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on

(a) the goods used or to be used for any purpose other than for table 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; and..."

9. From the bare reading of the aforesaid provisions, it would appear that the provisions are restrictive in nature and the restrictions so placed are given in clauses (a) and (b) of subsection (1) of section 8 of the Sales Tax Act, 1990. In other words, goods used for a purpose other than production of taxable supplies or the goods specified by the federal B Government as not qualified for input tax adjustment are prohibited for claiming the input tax adjustment. In the present case, the goods in question are spare parts which are necessary for the production of taxable goods and it is in an admitted fact by both the parties.

10. Nevertheless, the input adjustment on the disputed goods has been denied by the respondents on the ground that goods in question arc machinery parts and the same do not conform to the requirements of subsection (1) of section 8 of the Sales Tax Act, 1990.

11. In this regard, it may be added that anything which directly contributes to the production of a taxable supply falls within the ambit of section 8 of the Sales Tax Act, 1990. The word "product" has been defined in clause (16) of section 2 of the Sales Tax Act, 1990. According to this definition, "produce" includes the process of printing publishing, lithography and engraving. And it also includes preparation of goods by changing it or transforming it. All these processes require changes and transformations of the raw materials to make goods for the purpose of taxable supply. And for that different parts and accessories are needed as these parts directly contribute to the production of goods which are meant for taxable supplies.

12. It must therefore follow as a necessary corollary that if any items or goods were purchased by a taxpayer as being intended for us as "machinery, plant, equipment, tool, spare parts etc." for the production C of goods meant for taxable supply, they would be eligible for extension of benefit of input tax adjustment. In this regard it would be worth noting for reliance the case of Chowgule and Co. (Pvt.) Ltd. v. Union of India, reported as AIR 1961, Supreme Court 1013:-- "....The question is not whether there is manual application of energy or there is application of machinery force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes `processing'. We are clearly of the view that the blending of ore in the course of loading through the Mechanical Ore Handling Plant amounted to `processing' of ore within the meaning of section 8(3)(b) and Rule 13 and the Mechanical Ore Handling Plant fell within the description "machinery, plant, equipment" used in the processing of ore for sale. It must 'therefore, follow as a necessary corollary that if any items of goods were purchased by the assessee as being intended for use as machinery, plant, equipment, tools, spare parts, stores, accessories, fuel or lubricants" for the Mechanical Ore Handling Plant, they would be eligible for inclusion in the Certificate of Registration of the assessee. (8) The question which then arises is as to whether items of goods purchased by the assessee for use in carrying the ore from mining site to the river side and from the river side to the Marmagoa harbour could be said to be goods purchased for use in mining or in processing of ore for sale. Now there can be no doubt, and indeed this could not be seriously disputed that the process of mining comes to an end when ore is extracted from the mines, washed, screened and dressed in the dressing plant and stacked at the mining site and the goods purchased by the assessee for use in the subsequent operations could not therefore be regarded as goods purchased for use `in mining'. The requirement of section 8(3)(b) and Rule 13 is that the goods must be purchased for use `in mining'. It is only, the items of goods purchased by the assessee for use in the actual mining operation which are eligible for inclusion in the certificate of registration under this head and these would not include goods purchased by the assessee for use in the operations subsequent to the stacking of the ore at the miming site. This view finds support from the decision of this Court in India Copper Corporation Limited v. Commissioner of Commercial Taxes, 16 STC 259; (AIR 1965 SC 891)..."

13. The important point to be noted here is that it is the effect of operations on the commodity that is material to determine nature of processes and the intention that for what purpose such goods were purchased and whether or not anything required for processing directly contributes to the production of taxable goods. All such materials will thus qualify for claim of input tax if the tax on such materials is already paid.

14. And as the appellant did qualify as claimant of input tax adjustment in terms of clause 2(i) of section 7 of the Sales Tax Act, 1990, therefore, his action to claim input tax adjustment was perfectly in order.

15. A reading of the impugned order reveals that the authorities below did fail to discuss the issues involved and failed to provide reasons on the basis of which they assumed that the lax paid on goods in question cannot be reclaimed or deducted as input tax. Simply assuming that machinery parts do not contribute towards the production of goods capable for a taxable supply is not correct. We are led to believe that a very narrow and restrictive application of law has been made by the tax officials. Whereas, to us the intention of the statute appears to be that except the restriction placed vide clauses (a) and (b) of subsection (1) of section 8 of the Sales Tax Act, 1990, there is no other operative restriction for allowing or claiming input tax where it is permissible. We are strengthened in this view by a judgment of the Supreme Court reported as Attock Cement Pakistan Ltd. v. Collector of Customs, Quetta (1999) 80 Tax 30 (SC Pak). In this illuminating judgment their Lordships have observed as under:-- "....Having come to the conclusion that accessories and spare parts having not been included by the Federal Government under section 8(2) of the Act, the appellant was entitled to claim adjustment of the input tax and therefore the impugned show-cause notice issued to the appellant is without lawful authority and jurisdiction...."

16. In this regard, we would also like to mention the judgment of the British Value Added Tax Tribunal. The Tribunal in the case of Broadhead Peel & Co. v. The Commissioners reported as (1984) VATTR 195, decided the admissibility of input paid on auto parts in respect of a car used for business. The Tribunal held, that if the car was recognized as a tool for business then it adjuncts will have the same status. The relevant para of the decision is reproduced below:-- "....once it is accepted that the car had such a purpose, it must in our view follows that each item as an adjunct of the car was used to fulfil the same purpose and to the same extent..."

17. It follows, that the extra items in that case were meant for the purpose of business with the result that claim of input tax was allowed. In this case, the admitted facts are that spares imported were part and parcel of machinery meant' for producing taxable supplies. And where it is accepted that installed machinery in the unit is meant for the purpose of making goods for taxable supplies, it follows that each item adjunct to the machinery is useable to fulfil the same purpose and to the same extent.

18. As per the provisions of section 8 of the Sales Tax Act, 1990, tax paid on the goods used for the purpose for producing taxable supplies is deductible. The conclusion arrived at by the sales tax authorities in this case does not seem to be based on the correct interpretation of law. We accordingly allow this appeal and set aside the orders passed by the Adjudicating Officer as well as passed by the Collector of Customs, Sales Tax and Central Excise Appeals. C.M.A./193/Tax (Trib.) Appeal allowed.