2007 PLP (Trib (PTD)

This appeal challenges the vires of impugned order, dated 17-4-2004, passed by the Collector of Customs, Sales Tax and Central Excise Adjudication, Karachi-III. According to the facts available on record, it is evident that during 1996 for a brief period, the drugs and medicines manufactured locally were liable to a levy of sales tax at the rate of 5% with effect from 1-7-1996 to 21-10-1996. The appellant accordingly followed the provisions of the Sales Tax Act, 1990 and did pay sales tax at the specified rate on its products.

2. The appellant in view of the provisions of section 7 of the Sales A Tax Act, 1990 claimed input tax adjustment in respect of those raw materials which were purchased during the relevant tax period and were consumed for making taxable supplies. Thus in each sales tax return filed during July, 1996 to September, 1996 the appellant while calculating its tax liability adjusted tax paid on its raw materials purchased and imported during the said period.

3. As a consequence of the scrutiny of their sales tax records, the respondent's functionaries issued a show-cause notice to the appellant on 20-11-2001 thereby alleging that the claim of input tax amounting to Rs.2,117,146 in respect of purchases made pertaining to closing stocks of raw materials and packing materials held on 22-10-1996 was not in accordance with law.

4. The appellants vide their reply to the show-cause notice maintained that they had purchased the goods during the period when the supplies of the appellants were liable to sales tax. Thus their claim of input tax credit in terms of section 7(1) of the Sales Tax Act, 1990 for the period when the supplies of end product were taxable was lawful. It was their point of view that amending law cannot take-away the vested right acquired by them under section 7 of the Sales Tax Act, 1990.

5. The matter came up for hearing before the Adjudicating Officer who did not agree with the point of view of the' appellant and upheld the objections raised by the auditors and enforced the demand. Hence the present appeal.

6. The appellant contends that as regards the claim of input tax on the raw materials on the available stocks purchased during the existence of sales tax levy on medicines, the input tax on purchases was liable to be set off within the framework of section 7 of the Sales Tax Act, 1990. The appellant further contended that the said issue has also been settled by the Honourable Lahore High Court vide its judgment delivered in C.A. No.66 of 1999 titled as Mayfair Spinning Mills Ltd. v. Customs. Excise and Sales Tax Appellate Tribunal. The appellant further contends that the said view has also been upheld by the Lahore Bench of the Customs, Excise and Sales Tax Appellate Tribunal vide its Order No.IV?A(9)377/2000, dated 26-1-2002 and subsequenty vide Order-in-Appeal No. K-55/02, dated 19-3-2002 the Karachi Bench of the Tribunal endorsed the said view.

7. On the other hand, the departmental representative has supported the impugned order while maintaining that the view taken by the Adjudicating Officer was correct on law and facts.

8. We have heard the rival parties and perused the record. From the records, it is evident that the tax adjustment has been claimed in respect of goods purchased during the continuance in operation of the provisions of the sales tax law creating tax liability w.e.f. 1-7-1996 to 21-10-1996 and at that time the supplies made by the appellant were liable to sales tax at the rate of 5%. A perusal of section 7 indicates that B a registered person is entitled to deduct input tax during the tax period in respect of taxable supplies made or to be made during that tax period. The facts are not disputed to the extent that the appellant correctly adjusted tax paid on raw materials upto 21-10-1996 as at that time, all the raw materials purchased were meant for consumption in production of taxable supply. However, the claim of the respondent is that by virtue of subsection 1(a) of section 8, the appellant was not entitled to deduct input tax as after 21-10-1996 he was not engaged in the production of taxable goods. It was further alleged by the respondent that on 21-10-1996 still a portion of raw material was available in stocks which was not used for the production of taxable supplies. Therefore, in the opinion of the Department the act of appellant did fall within the mischief of subsection 1(a) of section 8 of the Sales Tax Act, 1990,and in their opinion the demand raised by them was perfectly in order.

9. Whereas the appellant submits that section 7 of the Act supports out rightly their point of view that the claim of input tax for adjustment as well as for refund is co-related only to the payment of input tax "paid during the tax period" and for the purpose of "supplies made or to be made". The purpose for which supplies were received and the amount of input tax paid having never been doubted, at least by the departmental authorities, their refusal to allow either refund or adjustment cannot be supported on any premises. The claim that input tax is related more to a tax period rather than the goods in relation to which it was paid is also supported by the provisions of section 10 (excess amount to be carried forward or refunded) and section 11 (assessment of tax) of the Sales Tax Act, 1990.

10. According to section 7, a registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the output tax. The learned counsel for the appellant is correct in pointing out that the use of' words "purpose" C and "supplies made or to be made" are indicative of the fact that the payment of input tax is available for adjustment as well as refund not with regard to any specific goods but with regard to the input tax paid during a particular tax period. The negatives contained in section 8 were also improperly interpreted by the departmental authorities. According to subsection (1) of section 8, a registered person is not entitled to reclaim or deduct input tax paid inter alia on the ground that goods bearing input tax were used or to be used for any purpose other than for taxable supplies made or to be made by him. The goods on which input tax was paid by the appellant were intended to be used for taxable supplies. The intention of the appellant at the time of receiving the supplies and making and paying (input tax) was apparently to make taxable supply to them. It has never been the case of the Department that either the supplies were not received or that these supplies were covered by the negative list as given in section 8 of the Act. The only objection of the Department being that the goods for which input tax was paid were no more available for taxable supplies. While holding that opinion, as noted earlier, the departmental authorities overlooked the use of word "purpose" and "supplies made or to be made", as used in section 7.

11. It is rightly pointed out in the order of the sales tax authorities that the provisions of sections 7 and 8 of the Act are not charging provisions and that these are machinery provisions to crystallize the liability to pay the tax as contemplated in subsection (3) of section 3 of the Act. To co-relate payment of input tax to the goods in question, in our way of thinking, is not in accordance with the provisions of the Act. The interpretation of departmental authorities does not appear justified while placing stress more on goods in respect of which the ,input tax was paid rather than the amount of tax itself and the period during which it was paid. Section 7 of the Act supports outrightly the submissions made by the learned counsel for the appellant that the claim of input tax for adjustment as well as for refund is co-related only to the payment of input tax "paid during the tax period" and for the purpose of "supplies made or to be made". The purpose for which supplies were received as also the amount of input tax paid having never been doubted, at least by the departmental authorities, their refusal to allow either refund or adjustment cannot be supported on any premises. The claim that input tax is related more to a tax period rather than the goods in relation to which it was paid is also supported by the provisions of section 10 (excess amount to be carried forward or refunded) and section 11 (assessment of tax) of the Sales Tax Act, 1990.

12. It may also be noted that if the appellant paying input tax on the supply of goods received by him was not entitled to its adjustment or refund then he was not covered by the said charging provisions inasmuch as he never made taxable supplies. Accordingly, the interpretation made by the Department becomes self-defeating. Therefore, the act of the input tax adjustment at the relevant tax period was perfectly in order. Accordingly, any charge in law would not affect the accrued rights and past and closed transactions.

13. We are therefore of the considered opinion that the tax adjustment made by the appellant in the relevant tax period was perfectly in order as being in accordance with law. Be that as it may, the demand raised by the Department is not legally sound. In this regard, we are strengthened in our views, by the judgment of the Lahore High Court delivered in C.A. No. 66 of 1999, titled as Mayfair Spinning Mills Ltd. v. Customs, Excise and Sales Tax Appellate Tribunal, wherein their Lordships have interpreted the law exactly on the same lines as given in preceding para.

14. The upshot of the above discussion is that appeal of the appellant is allowed to the extent that claim of input tax in respect of raw materials available in stock on 21-10-1996 was perfectly in order and the respondent's demand in that regard is not upheld. H.B.T./184/Tax (Trib.)???????????????????????????????????????????????????????????? Appeal allowed.