2021 PLP 1007 (PTD)

MUHAMMAD JUNAID GHAFFAR, J.

Through these petitions, the Petitioners have impugned respective Show-Cause Notices issued by the Respondent-Department and so also vires of S.R.O. 450(I)/2013 dated 27.05.2013 (SRO-450) and Section 8(1)(h) & (i) of the Sales Tax Act, 1990 (Act). Through these Show-Cause Notices, the Petitioners were confronted as to why the Input Tax adjustment claimed in violation of SRO 450 and Section 8(1)(h) & (i) of the Act shall not be disallowed.

2. Petitioners Counsel have made their submissions; however, without any disrespect to all learned Counsel, their arguments have been noted and recorded in this judgment collectively for ease, convenience and to avoid overlapping, if any. They have argued that the disallowance / restriction of input tax through impugned SRO and 8(1)(h) & (i) of the Act is unreasonable, confiscatory in nature and against Section-7 of the Act; that the products and material on which Input Tax is being denied are used directly in improving the manufacturing of the end product, hence Input tax adjustment cannot be denied; that Section-7 allows Input tax adjustment and is a substantive provision, whereas, through impugned SRO and 8(1)(h) & (i) of the Act, such Input is being denied, and therefore, cannot be sustained; that without these materials on which Input Tax is being denied, no manufacturing of the end product can be done; that all these materials are directly relatable to taxable supplies and before such determination no final conclusion can be inferred so as to deny the input tax adjustment; that these provisions are within itself contradictory, and therefore, should be interpreted in favour of the taxpayers; that no reasonable justification has been provided for denying the Input Tax adjustment in question; that such restriction is unreasonable, and is therefore, liable to be declared as ultra vires and show-cause notices be vacated. In support they have relied upon various cases.

3. Similarly contention of Respondents Counsel and learned D.A.G. have been recorded collectively and they have argued that Section-7 is subject to Section 8 (ibid) as it has a non-obstante clause, and therefore, Input Tax claim is not absolute; that even otherwise, the Petitions are not maintainable as show-cause notices have been directly challenged; that these material and equipment are not direct constituent of the end product; hence not entitled for any Input Tax; that the burden and consequence of denying and or restricting any Input Tax adjustment is even otherwise on the consumer of the end product and not on the Petitioners, hence, they have no case. In support reliance has been placed on various cases2.

4. We have heard all the learned Counsel and perused the record. It appears that the Petitioners are manufacturers engaged in the manufacturing of various products and have come before this Court on issuance of Show-Cause Notices issued to them by the Respondent-Department after examination of their respective Sales Tax Returns. It is case of the department that the Petitioners have availed various Input Tax Credits, which were impermissible in terms of Section 490(I)/2004 dated 12.06.2004 issued in terms of section 8(1)(b) of the Act duly amended by SRO 4503. It appears that such Notification being in field, the Legislature also amended Section 8(1), whereby, through clauses (h) & (i) most of the products / materials so notified in SRO 450 have now been included in Section 8 (ibid), which disallows tax credit. In essence after incorporating these items in Section 8(ibid), the SRO had become redundant; but was not withdrawn, and therefore, the Petitioners have challenged the vires of this SRO 450 in addition to Section 8(1)(h) & (i)4 of the Act. The Act in question provides a mechanism of input tax as against output tax and the refund, if so accrued. The said mechanism in governed by the provisions of section 7 (determination of tax liability)5 and section 8 (Tax Credit not allowed) and perusal thereof reflects that in terms of section 7 (subject to Section 8 and Section 8B) a taxpayer is entitled to deduct input tax paid or payable for the purposes of taxable supplies made or to be made by him from output tax due from him in respect of a particular tax period. There are other restrictions and mechanisms under Section 7 of the Act, which for the present purposes are not relevant; however, one may make note of the fact that such admissibility of input tax adjustment or refund is qualified by and through section 8 ibid. Lastly, section 8 of the Act puts an embargo and restriction, providing inter alia that a tax credit shall not be allowed and a registered person shall not be entitled to reclaim or deduct input tax paid for any purpose other than for the taxable supply made or to be made by him; and again on any other goods, which are notified by the Federal Government and so on and so forth. Here the goods were first notified in terms of section 8(1)(b) vide SRO 450, and thereafter now form part of the Act in section 8(1)(h) & (i). The Petitioners' precise case is that the items in question are directly used in facilitating and improving the manufacture of the end product; as a consequence, are direct constituent of the taxable supply, and therefore, covered when section 7 read with section 8 are read harmoniously; hence, there was no occasion to deny input tax adjustment or refund through impugned Notification and the provisions of section 8(1)(h) & (i) of the Act. However, we are not inclined to agree with this contention as this issue is already settled by a learned Division Bench Judgment of this Court in the case of AMZ Spinning6 by holding7 that on account of a non obstante clause in section 8, it shall override and prevail over the provisions of section 7 and that the disentitlement to seek adjustment is based upon provision of section (1)(b) itself and the very purpose of enacting section 8(1)(b) was to deny adjustment of input tax also on such items which though are used in the manufacture and production of taxable goods or supplies; but the Federal Government in its discretion denies to extend such benefit to the taxpayer. The ratio of the aforesaid judgment in pith and substance also applies to 8(1)(h) & (i) of the Act inasmuch as previously the goods, on which Input Tax Adjustment was denied, were notified through Notification under section 8(1)(b) of the Act, whereas, presently not only a Notification to that effect has been issued i.e. S.R.O. 450; but so also now the goods on which Input Tax Adjustment or refund is inadmissible have been incorporated in section 8(1)(h) & (i) of the Act. Nothing has been argued before us so as to how in view of this finding the present case can be distinguished and as to how the impugned SRO and the provisions of section 8(1)(h) & (i) of the Act are ultra vires. Though an attempt was made by placing reliance on various judgments cited by them; however, in the facts and circumstances of this case, all these judgments are irrelevant and in our view the issue in hand is appropriately covered by the judgment in the case of AMZ Spinning of a learned Division Bench of this Court. We are of the view that it is the prerogative of the Legislature to allow and / or to deny Input Tax Adjustment, whereas, in the present matter, the Petitioners have directly come before us on issuance of show-cause Notices and it is yet to be determined that whether all these goods and / or materials on which Input Tax is being claimed or has been claimed by the Petitioners, were used in the manufacturing of the taxable supplies made by them. Such determination is otherwise dependent on the factual plane, and therefore, even otherwise, we are not in a position to determine and adjudicate the same in our Constitutional Jurisdiction. The intent and purpose of 8(1)(h) & (i) of the Act and so also SRO-450 reflects that the Legislature has decided that these materials, which have been so notified, are not a direct constituent of a taxable supply, whereas, even otherwise it is settled in the case of AMZ Spinning that Input Tax Adjustment can even be denied on materials, which are a direct constituent of a taxable supply.

5. Respondent's Counsel had placed reliance on8 which is a single bench judgment of the learned Lahore High Court wherein a similar challenge to vires of section 8(1)(h) & (i) had failed and in response the petitioner's Counsel argued that it has been set-aside in appeal

9. However, on perusal of Appellate Courts judgment it transpires that it has not been set-aside; but modified in that the petitioners were required to respond to the show-cause notices with directions to the adjudicating officer to interpret section 8(1)(h) & (i) on case to case basis after determining facts of each case without prejudice to the findings in this regard. We, respectfully do not agree with this part of the judgment of the Appellate Court inasmuch as the Appellate Court had already arrived at a contrary conclusion10 after relying upon a judgment of the Hon'ble Supreme Court in the case of Attock Cement11 and therefore, in such circumstances in our considered view adjudicating authority cannot take a contrary view once the Supreme Court and the High Court had already arrived at a conclusion that any input tax adjustment under section 7 of the Act is subject to section 8 ibid. Therefore, the opinion of learned single judge of the Lahore High Court in Nishat Mills12 is correct and applicable to the present facts before us.

6. Adding to this we (this Division Bench) have already decided this issue in case of Input Tax Adjustment on packing materials consumed by the zero rated industries under SRO No.1125(I)/2011 vide Judgment dated 24.12.202013 and held that notwithstanding the fact that packing material is a direct constituent of a taxable supply, in view of a non-obstante clause as well as in absence of any infirmity and or defect in the powers of the legislature to enact section 8(1)(b) of the Act, input tax adjustment or refund can be validly denied to a tax-payer in respect of such direct constituent. The same ratio applies herein in respect of section 8(1)(h) & (i) of the Act, and therefore, finding no substance in these Petitions, which otherwise are not maintainable as merely Show-Cause Notices have been issued, we in the given facts and circumstances of these cases, on 24.11.2020, by means of a short order had dismissed these Petitions; and these are the reasons thereof. KMZ/C-5/Sindh Petitions dismissed.