2006 PLP (Trib (PTD)

This appeal challenges the vires of the order, dated 11-6-2005 passed by the Collector of Customs, Sales Tax and Central Excise Adjudication, Karachi-III, whereby a demand of sales tax in respect of an item namely `Nitrous Oxide' was upheld and the appellant was directed to make the payment good.

2. According to the facts available on record, the appellant has been supplying nitrous oxide to hospitals and clinics since, 1968 and the supplies made by the appellant have been exempt from sales tax since then. The basis for this exemption was that nitrous oxide is classifiable as a `medicament' under Chapter 30 of the First Schedule to the Customs Act, 1969, whereby all the `medicaments' are exempt from tax. The said exemption of sales tax on nitrous oxide remained operative through various Notifications issued by the Federal Government under subsections (1) and (2) of section 7 of the Sales Tax Act, 1951.

3. According to the facts available on record, the litigation between the parties started on 14-3-1987, when the appellant received a letter from the Superintendent, Central Excise and Land Customs whereby he was directed to pay sales tax on the supplies of nitrous oxide made by him. On 15-3-1987, the appellant informed the Department that the unit was supplying nitrous oxide under a special packing meant only for medical use. The appellant further stated that the gases i.e. a mixture of oxygen and nitrogen was being supplied to hospitals and clinics for use as an anesthetic agent, therefore, the product was covered under PCT Heading 30.03, as being anesthetic agent and an item included for exemption from payment of tax under Notification S.R.O. 666(I)/81, dated 25-6-1981. The said S.R.O. stated that goods produced and manufactured in Pakistan and falling under heading numbers listed therein where wholly exempt from payment of sales tax.

4. The appellant was directed to furnish affirmations on 29-3-1987 and 30-3-1987 to the effect that nitrous oxide was manufactured and supplied by the appellant solely to hospitals and clinics for use as an anesthetic agent for medical purposes. The said affirmation was immediately furnished by the appellant.

5. However, on 8-4-1987, the Superintendent, Central Excise and Land Customs decided that nitrous oxide was not exempt under S.R.O. 666(1)/81 and that sales tax was payable by the appellant on the supplies made by it. After the aforesaid decision, the appellant received another communication on 6-4-1987 from the Superintendent stating that the request made in the appellant's letter of 16-3-1987 had been examined and it had been decided that the appellant's supplies of nitrous oxide were not exempt from the payment of sales tax.

6. The action taken by the Superintendent was challenged by the appellant before the Honourable High Court of Sindh through a Constitution Petition No.D-351 of 1987. The Honourable High Court vide their judgment, dated 12-1-1989, held that nitrous oxide was a `medicament' falling. under Heading 30.03 of Chapter 30 and therefore appellant's disputed product was exempt from the payment of sales tax under S.R.O. 666(I)/81. His Lordship, Mr. Justice Saeeduzzaman Siddiqui who delivered the opinion of the Court based his reasoning on the fact that nitrous oxide consisted of oxygen and nitrogen and the gas was produced when two constituents are compounded together. The Court further observed that since nitrous oxide was used as an anesthetic agent, it was a medicament which had therapeutic use. The appellant's petition was accordingly allowed and demand of tax from the appellant was declared as illegal.

7. The said order of the High Court was challenged by the respondent before the Supreme Court through Civil Petition for Leave to Appeal No.268 of 1989. The said petition was dismissed by the Supreme Court by upholding the order of the High Court. Since the time of the Supreme Court judgment the appellant neither collected nor deposited an any sales tax on supplies of nitrous oxide until the issuance of Notification 208(I)/02, dated 5-4-2002.

8. The Notification S.R.O. 208(I)/2002, stated that items registered as drugs under the Drugs Act, 1976 and listed therein were exempt from payment of sales tax. Nitrous oxide was not listed in the items which were exempt under the said Notification. Therefore, the appellant started to collect and deposit sales tax on supplies of nitrous oxide.

9. On 23-8-2002, the Federal Government vide Notification S.R.O.555(I)/02, again exempted the supply of medicaments as classifiable under any heading of Chapter 30 of the First Schedule to the Customs Act, 1969 from sales tax with immediate effect. Pursuant to S.R.O. 555(I)/02, the appellant stopped collecting sales tax on supplies of nitrous oxide made by it to hospitals and clinics. However, on 31-1-2005, the respondent issued a show-cause notice, wherein it was alleged that the appellant had during the period April, 2002 to January, 2004, made supplies of nitrous oxide valuing Rs.95,186,330 on which dales tax amounting to Rs.14,277,951 had not been paid. The notice further stated that since the appellant had not paid sales tax on supplies of nitrous oxide, he accordingly did contravene the provisions of sections 2(20), 3, 6, 7, 22, 23 and 26 of the Sales Tax Act, 1990 read with S.R.O. 208(I)/2002.

10. The appellant vide his reply to the show-cause notice denied the charges levelled against him. However, the respondent did not agree with their point of view and passed the impugned order hence this appeal.

11. The appellant now contends that:-- (a) The decision made by the respondent overlooked the provisions of Rule 3 of the General Rules for the Interpretation of Harmonized System, which provides guidelines for the classification of goods when these are classified under two or more headings. This rule states:-- "(3) When by application of Rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows: (a) The heading which provides the most specific description shall be preferred to the headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set up for retail sales, those headings are to be regarded as equally specific in relation to those goods even if one of them gives a more complete or precise description of the goods. (b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in set for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable. (c) When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration. (d) Nitrous oxide is very commonly used in dentistry and other surgical procedures as an anesthetic agent. Be that as it may, as an anesthetic agent it becomes a drug within the meaning of Chapter 30 and stands classifiable within Heading 30.03 as a medicament having `therapeutic' or 'prophylacitc' use. Nitrous oxide supplied by the appellant continues to be a medicament under Heading 30.03 of the Customs Tariff which was in force in 2002 and reads as follows:-- Medicaments (excluding goods of headings of 30.02,30.05 and 30.06) consisting of two or more constituents which have been mixed together for therapeutic or prophylactic uses not put in measured doses or in forms or packing for retail sale. (e) Heading 28.11 of the Harmonized Commodity Description and Coding System, 2002 reads as follows:-- 28.11. Other inorganic acids and other inorganic oxygen compounds of non-metals. Other inorganic acids. 2811.1 Hydrogen fluoride (hydrofluoric acid) 2811.19 Other Other inorganic oxygen compounds of non-metals 2811.21 Carbon dioxide 2811.22 Silicon dioxide 2811.23 Sulphur dioxide 2811.29 Other The explanatory notes to Heading 28.11 of the Harmonized Commodity Description and Coding System, 2002 describe the uses of nitrous oxide as well as its various forms and states. The explanation reads as follows: Dinitrogen Oxide (nitrous oxide) (N2O) Sweet tasting gas, soluble in water and presented in liquid for. Used in the gaseous state as an anesthetic, and in the liquid or solid state is a refrigerating agent. It is therefore stated that Heading 28.11 clearly envisages that, in the gaseous state, nitrous oxide as used as an anesthetic. (f) The explanatory notes to Heading 30.03 of the Harmonized Commodity Description and Coding System, 2002 provide that "this heading covers anesthetics used in human or veterinary medicine or surgery". Therefore, it is submitted that nitrous oxide may be Chapter 28 product but the explanation under Heading 28.11 is very clear on the fact that nitrous oxide is used as an `anesthetic', and `anesthetics' are covered by Heading 30.03 as stated- above. It is 'therefore submitted that since the appellant is supplying nitrous oxide purely as anesthetic agent to hospitals and clinics, it is classifiable as a medicament under Heading 30.03. As such, nitrous oxide is exempt from the payment of sales tax under S.R.O. 555(1)/02, dated 23-8-2002. The appellant accordingly pleads for the vacation of the impugned order.

12. The departmental representative on the other hand contended that `nitrous oxide' is more specifically classificable under Chapter 28, and under the rules of interpretation of the Harmonized System of classification, it cannot be deemed to be exempted as `medicament' under Chapter 30.

13. Rival parties have been heard and case record examined. The issue' of grant of exemption to nitrous oxide is quite old one as is evident from the records of the case. The matter was, however, settled by the Honourable Sindh High Court as well as by the Supreme Court vide their respective orders.

14. This time the issue has been raised by the respondent on the ground that according to the rules of interpretation of the Harmonized Commodity Description and Coding System, the goods are specifically classifiable within the framework of Chapter 28, therefore, the goods are chargeable to sales tax, since the same cannot be treated as "medicament of Chapter 30".

15. The emerging issue gains importance in the light of exemption Notification whereby relief from payment of tax has been extended to `medicaments' falling under Chapter 0 of the Customs Tariff. Whereas, the contention of the Department is that since the disputed chemical is classifiable under Heading 2811.2900, therefore, it is not exempted under S.R.O. 555(I)12002, dated 23-8-2002.

16. A perusal of propositions raised by the appellant and the counter proposition raised by the respondent reveals that their case before the High Court was that `Nitrous Oxide' gas supplied by them to the Hospitals fell under specified item of the then exemption granting Notification as being a product includable within the framework of Heading 30.03 of the Customs Tariff and was exempt from payment of sales tax. The present respondent at that time pleaded that `nitrous oxide' gas was an item of Chapter 28 (more specifically classifiable under heading 28.13), and as such it was not exempt. And even today the proposition remains the same meaning thereby that appellant claims that nitrous oxide when supplied for use as an anesthetic agent will amount to a supply of drug and as such the same is classifiable under Heading 30.03, whereas the respondent believes that goods being chemicals are classifiable under Chapter 28 and as such go out of the scope of Chapter 30.

17. The difference in approach' to solve the problem appears to be that one is saying "look, it is the use which determines the character and ultimate classification," the other is saying, "look, it is the specific classification which will determine the role of exemption".

18. The fact that the issue settled by the superior Courts is again being agitated would look more clear from the following observation of the Honourable Supreme Court:-- "

The learned High Court examined the question by referring to Chapter 30 of the Pakistan Customs Tariff, which is exempted from payment of sales tax under S.R.O. 666(I)/81, dealing with pharmaceutical products and PCT Heading No.30.03 dealing with the `medicaments' and the explanatory note to Chapter 30 which defined `medicaments' for the purpose of PCT Heading No.30.03 and the definition of `Nitrous Oxide' in the dictionary of Scientific and Technical terms, and took the view that one of the uses of `Nitrous Oxide' was an anesthetic agent in dentistry and surgery and according to explanatory note No. 1(1) to Chapter 30 of PCT products comprising two or more constituents which have been mixed or compounded together for therapeutic or prophylactic uses were covered under the PCT. Heading No.30.30. The learned High Court then referred to definition of words therapeutic and prophylactic as given in various dictionaries and also took note of the fact that the respondents had specifically alleged in paragraphs 2 of their petition that `nitrous oxide' produced by them was exclusively used for medical purposes as anesthetic agent in hospitals and clinics which allegation of the respondents (petitioners in the High Court) was admitted by the petitioners (respondents in the High Court) in para. 2 of their counter-affidavit, and came to the conclusion that as anesthesia is administered during surgery for relieving the patients against pain and to help them in recovery from disease, it had not doubt that `nitrous oxide' has a therapeutic use when administered as an anesthetic agent in surgical cases. In this connection the High Court also referred to explanatory notes to Brussels Nomenclature in respect of Heading 30.03 as these notes have been always regarded as useful guide to the interpretation of various headings in the Customs Tariff, and held that in accordance with the explanatory notes appended to Heading No. 30.03 both in the PCT as well as Brussels Nomenclature `nitrous oxide' gas when used as anesthetic agent in surgery falls under Heading No.30.03 of PCT as it is covered in the definition of medicament. Thus, on the above findings the learned High Court finally held that `nitrous oxide' supplied by the respondents to hospitals for use as `anesthetic agent' falls under Heading No.30.03 of the Pakistan Customs Tariff and as such it was exempt from appellant under S.R.O. 666(I)/81, dated 25-6-1981 and declared the classification of `nitrous oxide' gas under Heading No.28.13 of Pakistan Customs Tariff by the petitioners as without lawful authority and of no legal effect, by its judgment, dated 12-1-1989..."

19. Even today, the legal position, remains the same. Anesthetic agents used for medical purposes are still classifiable under Heading 30.03. As there is no dispute over the character and uses of product, we believe that the findings given by the Honourable Sindh High Court and as upheld by the Supreme Court still remain valid in the field as no fresh I reasoning has been given by the respondent. By respectfully and humbly following in the dictum of the Sindh High Court as confirmed by the Supreme Court, we conclude that disputed goods are covered under heading 30.03 and are exempt from payment of tax.

20. Be that as it may, the impugned order is accordingly set aside. H.B.T./173/Tax (Trib.) Appeal accepted.