2021 PLP 347 (PTD)

MUHAMMAD JUNAID GHAFFAR J.

All these petitions involve a common controversy, whereby, the Petitioners are aggrieved of a Proviso1 inserted in Condition (x) in S.R.O 1125(I)/2011 dated 31.12.2011 (1125) through an amending S.R.O. 491(I)/2016 (491) by virtue of which the claim of input tax and or refund on all sorts of packing materials has been disallowed on the supply and export of zero rated goods as specified in SRO 1125. The prayer in the leading petition is as follows; a. Declare that the proviso to condition (x) in SRO 491(I)/2016 is unlawful, unconstitutional, and void ab-initio insofar as it relates to the disallowance of Input Tax on packing material. b. Declare that restriction placed through condition "x" of the SRO 491(I)/2016 dated 30th June 2016 is not applicable to zero rated supplies in terms of clause 'a' of section 4 of the S.T.A., 1990. c. Declare that the denial to allow adjustment of Input Tax under the Impugned Notification on packing material is ultra-vires the provisions of the Sales Tax Act, 1990 as well as against the fundamental rights enshrined under the Constitution of the Islamic Republic of Pakistan, 1973. d. Declare that the powers conferred upon the Federal Government to disallow input tax adjustment through Section 8(b) are only available to be used harmoniously with the provisions of Section 7 and in view of the overall theme of Sections 8 and 8B. e. Restrain the respondents from preventing the Petitioners submission of their monthly sales tax returns filled under the Act, 1990 electronically and / or manually in which input adjustment is claimed by them for Packing Material as stated in the proviso to condition (x) of SRO 491(I)/2016 and/or restrain the respondents from rejection of refund claim of the Petitioners against Packing Material in the garb of proviso to condition (x) of SRO 491(I)/2016 and/ or from taking any coercive action against the Petitioners. f. Any other, better, consequential, adequate and/ alternate relief which this Honourable Court may deem fit under the circumstances to grant. g. Cost of the petition may be granted.

2. Mr. Arshad Hussain appearing on behalf of some of the Petitioners has contended that by virtue of this Proviso input tax credit or refund has been denied on the packing material of all sorts used in the manufacture of zero rated goods, notwithstanding that it is an integral part of taxable supply having direct connection with the taxable supply of the goods; that the business of the petitioners and its sales tax liability is 0% or zero rated under Section 4 of the Sales Tax Act, 1990 (Act) read with S.R.O 1125; hence, claim of input tax and or refund cannot be circumscribed; that it is discriminatory as well as confiscatory in nature as through an S.R.O, a benefit conferred by the Statute i.e. the Act, has been withdrawn; that input tax adjustment or refund is a right conferred by the Statute; hence cannot be taken away without any lawful justification; that admittedly the final taxability of the product(s) is zero rated; hence if this amendment and the Proviso is sustained, it would increase the input cost without having any justification; that even otherwise packing material is admittedly a direct constituent of the taxable supply, therefore, input tax adjustment or refund in terms of Section 7 of the Act cannot be denied; that this Proviso has been subsequently deleted by restoring S.R.O. 1125 to its original position through a new S.R.O. 777(I)/2018 dated 21.06.2018 ("777") and being a beneficial notification must be given retrospective effect as the Petitions were pending; that this restriction via the proviso to condition (x) has failed to appreciate the essence of value added tax regime; that the petitioners pay sales tax on purchase of all raw materials which is their input, utilize it in manufacturing and when the end product is sold, (being zero rated), either take input adjustment or claim refund of the excess amount of input tax available, and therefore, it is a substantive right which cannot be curtailed through an amending notification; therefore, in view of these submissions, the Petitions be allowed. In support he has relied upon2.

3. Mr. Ajeet Sundar in some of the Petitions, in addition to adopting these arguments, has further contended that the rules cannot go beyond the Statute; that Section 8 of the Act can only be exercised in respect of the classes of goods provided therein, whereas, packing material itself is a direct constituent of the taxable supply; hence Section 8 ibid cannot be invoked; that the Petitioners have been discriminated and a right conferred by the Statute cannot be taken away through a Notification. In support he has relied upon

3. Insofar as other learned Counsel are concerned they have adopted these arguments.

4. Mr. Ameer Bakhsh Metlo, appearing on behalf of the department in some of the cases has contended that the Act is not entirely based on the concept of value added tax; hence restriction can be placed; that the Act confers powers to deny input tax adjustment and refund; that Section 8 of the Act has an overriding effect by means of a non-obstante clause; that the amending Notification is not a beneficial notification, but a conscious decision of the Government in implementing its policies; hence no right accrues to the Petitioners. In support he has relied upon4.

5. Mr. Kafeel Ahmed Abbasi also appearing for the department in some of the cases has contended that Section 4 by itself is not unrestricted, and the Government in terms of the Proviso, can place restrictions on the class of goods on which input tax claim or refund can be denied; that the argument that the amending proviso remained in field for some specified period and has been withdrawn, hence, SRO 777 be given retrospective effect is misconceived and not tenable inasmuch as it was pursuant to a conscious policy decision of the Government and once the purpose being served, was then reversed; therefore, amending Notification cannot be given retrospective effect; hence, the petitions are liable to be dismissed. Other learned Counsel appearing on behalf of the department have adopted these arguments.

6. We have heard all the learned Counsel and perused the record. It appears that the Federal Government in order to promote exports and ease out the procedure and to lessen the burden on the export oriented industries introduced a scheme of zero rating in respect of five different categories of industries including Leather, Textile, Carpet, Surgical and Sports Goods and for such purposes issued S.R.O. 1125 in exercise of the powers conferred by subsection (1), clause (b) of subsection (2) and subsection (6) of section 3 and clauses (c) and (d) of section 4 read with clause (b) of subsection (1) of section 8 and section 71 of the Sales Tax Act, 1990. Though all exports are otherwise zero rated pursuant to S.4(a) of the Act; however, through this mechanism under SRO 1125 the said category of Export Industries were further facilitated to have a concept of no input tax; hence no output tax. This was in fact the initial model of the scheme which from time to time has gone through a considerable change through various amendments; but for the present purposes, the controversy surfaced when S.R.O. 491 was issued and condition (x) was substituted and a Proviso was added

5. It could be seen that the very amendment by way of substitution of clause (x) of SRO 1125 is in fact conferring certain benefit to the tax-payer by allowing input tax adjustment of tax paid on purchases ultimately used in the goods meant for exports. However, by virtue of the Proviso, it was provided that no input credit tax or refund shall be admissible on the packing material of all sorts. Here interestingly on the one hand the proviso has been challenged as being ultra vires and unlawful; but at the same time benefit of clause (x) itself is being claimed and justified; notwithstanding the fact that SRO 1125 has been issued in terms of the same provision of the Act. How this could be done is not clear to us. Is it the case of the Petitioners that this proviso to clause (x) of SRO 1125 is ultra vires to the Constitution then perhaps the very provision i.e. section 4 and section 7 read with section 8 will also have to be declared to be so, if at all any case is made out, which in our opinion is not the case. Nonetheless, in that case even the exemption and other benefits of input tax and zero rating being enjoyed by the Petitioners would whisked away. This is definitely for sure is not what the Petitioners want through these petitions. What perhaps they want is only that the proviso be declared as ultra vires; but to what is not explained by them in any manner. We have not been assisted as to in what manner, and with which entry of the legislative list(s) of the 4th Schedule to the Constitution, the same is in conflict and ultra vires.

7. 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 4 (Zero Rating)6, section 7 (determination of tax liability)7 and section 8 (Tax Credit not allowed)8 and perusal thereof reflects that in terms of S.4, goods exported or goods specified in the 5th Schedule shall be charged to tax at the rate of 0%; the first Proviso provides for some restrictions and inadmissibility of zero rating, whereas, the second Proviso restricts the amount of credit of input tax paid by a person in respect of a zero rated supply of goods otherwise chargeable to sales tax. Similarly, section 7 postulates that 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. It is the case of the Petitioners that once it has come on record that the goods in question being used for packing of the finished product; is a material used in the taxable supply as covered by section 8(1)(a); therefore, there was no occasion to deny the facility of input tax adjustment or refund, or for that matter pursuant to any notification or order issued in terms of section 8(1)(b). According to the petitioner's case in SRO 1125, Section 8(1)(b) has been invoked and this restriction is confiscatory, discriminatory and in violation of section 4 read with section 7 and section 8(1)(a). 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 Spinning9 by holding10 that on account of a non obstante clause in S.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 8(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. This judgment is a complete answer to the argument of the petitioners Counsel that once an item is covered by section 8(1)(a) ibid; it cannot be notified in terms of section 8(1)(b) to deny any such input or refund of tax.

8. As to the second limb of the argument of the Petitioners Counsel that after two years and during pendency of these petitions the impugned proviso has then been omitted vide SRO 777 and must be given retrospective effect is also misconceived inasmuch as again this judgment of AMZ has also dealt with this issue. It that case a list of products was notified vide SRO 578 and diesel was included in such items on which no input tax was admissible at the relevant time. Thereafter an amendment was made and diesel was then deleted from the list of items notified vide SRO 578 and it was argued that such amendment be given retrospective effect. However, the learned Division Bench was least impressed by this argument and was pleased to discard the same.

9. In somewhat identical facts in the case of Dewan Cement11 a Petition was filed seeking a declaration that second Proviso to Section 4 of the Act and the SROs issued thereon are ultra vires to the Act itself as Input Tax Facility on a zero rated item cannot be denied through a Notification under Section 8(1)(b) of the Act. It was further argued that during pendency of the proceedings, the Notification, whereby, the Input Tax was restricted and denied, was withdrawn, and therefore, retrospective effect can be given to that Notification. A learned Division Bench of this Court was least impressed and while dismissing the Petition was pleased to observe12 that Section 8(1) starts with a Non-Obstante Clause, and therefore any zero rating under Section 4(ibid) was qualified and subject to Section 8(1)(b). As to giving retrospective effect to the subsequent SRO, whereby, the earlier Notification restricting Input Tax Adjustment was withdrawn; again the learned Division Bench was not convinced with this argument and went on to hold that this would amount destroying and disturbing or impairing the obligations and rights that have accrued pursuant to the earlier Notification in field; hence the argument of beneficial construction and or retrospective effect to the subsequent SRO cannot be availed or granted to the Petitioner. In view of the above pronouncements, in our considered view, the controversy raised on behalf of the petitioners already stands settled; hence, no case for deviating from these precedents is made out. Both the issues raised and argued that section 7 read with section 8(1)(a) allows and permits input tax adjustment and or refund even on zero rated supply of goods on all materials which are used as a constituent part of the taxable supply; as well as seeking retrospective effect of a notification issued subsequently (later in time) pursuant to which input tax adjustment or refund is again permitted, have been decided against the petitioner / taxpayers and it has been held that in terms of section 8(1)(b) any goods can be notified for disallowing such input tax adjustment or refund including such goods which though are used in the manufacture and production of taxable goods (packing material here) on which input tax adjustment and or refund is normally admissible. The conclusion is that all such input tax adjustment or refund would be governed by and in terms of S.8(1)(b) of the Act.

10. Accordingly, we are of the view that the petitioners have failed to make out any case for indulgence under our constitutional jurisdiction; hence, all listed petitions are hereby dismissed. KMZ/L-1/Sindh Petitions dismissed.