1985 PLP 777 (PTD)

We would do not better than to reproduce herein below paragraph (11) of that judgment wherein the contention is noted and paragraphs 16 to 23 thereof as Mr. Aziz Munshi learned Attorney‑General who is present on Court notice has relied on that decision in reply to the contention of Mr. Ali Ather as a similar contention was. raised by Mr. Ali Ather in that case :‑‑ "

11. It is submitted by Mr. Ali Ather that the Income‑tax Appellate Tribunal wrongly relied on section 3(6)(d) of the Act to subject the partly manufactured goods namely, 'cotton yarn' to sales‑tax as the words "for the use by manufacturer or producer" used in section 3(6)(d) of the Act only means Independent utilization of the products by the manufacturer or producer as contradistinguished from the assimilation of the goods in the process of manufacture culminating in the end- product. He submitted that no sales tax could be levied on cotton yarn used in the manufacture of 'Mazari' cloth unless and until such use of the goods has been made a taxable event under section 3(4) of the Act, and as none of the taxable events mentioned therein ever took place, therefore, no sales tax was leviable on cotton yarn used in the manufacture of 'Mazari' cloth. In support of the submission he heavily relied on Latif Bawany Jute Mills Ltd. and 4 others v. The Sales Tax Officer. Companies Circle 1, Dacca and another (supra). The Commissioner of Sales Tax North Zone (West Pakistan), Lahore v. Muhammad Hussain & Co., Lahore (supra). The Commissioner of Sales Tax, Rawalpindi Zone, Rawalpindi v. Shafiq Textile Mills Ltd., Gujrat (supra) Mr. Alt Ather himself brought to our notice another decision of Lahore High Court namely, Hunza Asian Textile & Woollen Mills Ltd. v. Commissioner for Sales Tax. Rawalpindi Zone, Rawalpindi 1973 P T D 544 wherein a view contrary to the view expressed in Commis sioner of Sales Tax v. Crescent Textile Mills Ltd. (1975 P T D 75), has been taken by that Court.

16. With regard to clause (d) of subsection (6) of section 3, it was argued that the word 'use' in this clause has been used in a limited sense i e. when the partly manufactured or produced article is used by the manufacturer independently and not when it is incorporated or assimilated into another product. However this argument was noticed and dealt with by the Supreme Court in Noorani Cotton Corporation v. Sales Tax Officer 'A' Ward, Lyallpur P L D 1965 S C 161 and the dictum laid down therein is binding on us in view of the Article 189; of the Constitution of the Islamic Republic of Pakistan, 1973, which is incorporated fn the Provisional Constitution, Order, 1981, by virtue of Article 2 thereof. In that case the appellants were licensed manu facturers under section 8 of the Sales Tax Act. They all carried on business of cotton ginning and extracting oil from the cottonseed obtained by ginning of cotton. They had not previously been paying sales tax on the manufacture of cotton seed but by virtue of a letter issued by the Central Board of Revenue, such a tax was demanded from them by the Sales Tax authorities under the provisions of the Act and then they all filed writ petitions in the High Court of West Pakistan, challenging the liability of the demand and contended that the tax was not leviable. The High Court rejected the contention and dismissed the petitions. On appeal the Supreme Court while analysing the relevant sections of the Sales Tax Act has dealt with the above argument and regarded the provisions of section 3(6)(d) of the Act as charging section for consum ing the partly manufactured goods when they are incorporated into another product on which sales tax is not to be paid. We here quote the relevant observations which appear at page 167 of the report :- "It will be proper to explain here the scheme of the Act. As the various provisions of the Act show the intention was to levy only one tax on manufactured or produced goods which are offered for sale to the con sumer. A process of manufacture may involve different stages of goods manufactured by one person may be purchased by another not for the purpose of consumption, but for being incorporated into another article on which sales tax is to be paid. A stage of manufacture or the manufacture of goods, which are to be incorporated in another article, is not liable to sales tax. To explain the point we may take as an illustration the very case with which we are dealing. Cottonseed is at first extracted from cotton. This is a manufacturing process ands if this cottonseed is sold to the consumer sales tax will have to be paid on the manufacture of cottonseed. However, the manufacturer may use this cottonseed himself for the production of cottonseed oil. In its turn the cottonseed oil, which is again, a manufactured article may be sold to one who manufactured vegetable ghee for the purpose of being incorporated in the vegetable ghee. In a case where the cottonseed oil manufactured by a person from cottonseed extracted by himself from cotton goes into the vegetable ghee the intention of the law is that sales tax may be paid only on the manufacture of vegetable ghee and should not be paid either on the production of cottonseed or on the production of cotton seed oil which productions become in such a case only steps in the manufacture of vegetable ghee. Now what is the device adopted for ensuring that sales tax is paid only at one stage in spite of what is contained in the charging section making all manufactured goods when they go to the purchaser liable to the payment of tax? The device adopted, as will appear from section 4 is, that the sale of "partly manufactured goods" to a manu facturer is not liable to the charge of tax. It may be clarified here that the Sales Tax Act does not recognise a manufacturer who has not obtained a licence under it for manufacture. The provision in section 4 is that the sale by a licensed manufacturer to another licensed manu facturer of partly manufactured goods is not liable to the incidence of tax. The definition of "partly manufactured goods" is that they are goods which are to be incorporated into another article. So these provisions are a sufficient guarantee that the tax will be paid only with respect to the last stage of manufacture of goods. However, there is one difficulty which had to be removed. Suppose the manufactured article into which partly manufactured goods are to be incorporated is for some reason not liable to the payment, of sales tax? In that case if no tax is paid on partly manufactured goods no tax will be paid at all. Therefore, in the definition of "partly manufactured goods" a limitation has been introduced that the article into which the goods are to be incorporated should be one which is liable to the payment of sales tax. If it is not liable to payment of sales tax then the goods, which are incorporated into it, are also manufactured goods on which sales tax has to be paid. One further difficulty would still remain. What is to happen if a person himself manufactures goods and then incorporates them into another article? There is no sale of the first manufactured goods because the person producing them is only using them for manufacture of other goods. Tax is payable only when there is a sale. In a case where the article that is ultimately produced is liable to the payment of sales tax there would be apparently no need of a provision relating to goods that are to be incorporated in the last article. Hut suppose that the last article is not liable to the payment of sales tax Unless, a special provision was made that person would not be paying any tax on the production of the first article too. This situation is met by the general provision is the last part of section 3(6) that the keeping of goods by the manufacturer for his own use would be regarded as a sale. As $ matter of fact this last proposition has been contested by the appellants and is one of the points argued by them before the High Court. We are stating the ultimate conclusion and the reasoning will appear shortly. To take up the first contention raised before the High Court namely that subsection (6) of section 3 could not be the basis of the imposition of sales tax in a case where the article was kept for use by the manu facturer, it will be observed that according to subsection 6(d) the Sales Tax Officer may determine the value for the tax in a case where C the good:, are kept for use by the manufacturer and such a transaction is to be regarded as a sale. The contention put forward on behalf of the appellants was that in the definition of "Sale" there was no extension of its meaning so as to include a case where the manufacturer keeps the goods for himself, that subsection (6) related only to assessment of value for the purpose of charge of tax, and that as long as the definition of "sale" did not include such a transaction there would be no liability to pay sales tax. While it has to be accepted that the correct way of bringing a transaction within the definition of "sale" was to make a provision in the definition there can be doubt at all as to the intention of the Legislature in subsection (6). It has clearly been provided that all such transactions are to be regarded as sales .for the purpose of this Act. At the same time if we do not regard this transaction as a sale subsection 6(d) becomes wholly redundant for then no need will ever arise of assessing the value in a case where manufactured goods‑are kept by the manufacturer. The need for such assessment arises only if tax is payable on goods which are kept by the manufacturer for his own use. There is one point which needs explanation here. According to section 3 (4) tax on manufactured goods is to be paid when goods are delivered to the purchaser or property in the goods passes to the purchaser. It does not say that tax is payable when there as a sale. Section 3(6) on the other hand does not use the word "purchaser" anywhere. It does not say that the keeping of goods for use by a manufacturer will amount to a delivery of goods to the purchaser or to the passing of property to the purchaser. However, it used the word "sale" and according to the definition of sale in the Sales Tax Act a sale occurs when property passes from one person to another. If the effect of subsection (d) be that keeping of goods by the manufacturer becomes a sale then property does pass to the purchaser. Even otherwise as we have stated then fact that value is to be computed in such a case necessarily involves that the keeping of goods by the manufacturer has become liable to the payment of Sales Tax."

17. The Supreme Court case of Noorani Cotton Corporation was con sidered and followed by the Lahore High Court in Hunza Asian Textile and Woollen Mills Ltd., Saidpur Road, Rawalpindi v. Commissioner of Sales Tax Rawalpindi Zone, Rawalpindi 1973 P T D

544. We may here with advantage quote the relevant observation with regard to the said case. These are :‑ "38.‑‑There is considerable force in some of these contention vehemently advanced before us by Mr. A. K. Brobi, learned counsel for the peti tioner. But this matter is no longer res interra before as now. In this connection; in Messrs Noorani Cotton Corporation. v. The Sales Tax Officer "A" Ward, Lyallpur P L D 1965 S C 161 under more or less similar circumstances the Supreme Court regarded section 3 (6) (d) of the Sales Tax Act as the charging section for such transaction. In that case, licensed manufacturers were carrying on the business of gaining cotton and extracting oil from cottonseed obtained by ginning The assessee were called upon to pay sales‑tax on the manufactured by one person may be purchased by another not for the purpose of con sumption, but for being incorporated into another article on which sales -tax is to be paid. In explaining this point further the Court observed that cottonseed is at first extracted from cotton. This is a manu facturing process and if this cottonseed is sold to the consumer, sales -tax will have to be paid to the manufacture of cottonseed. However, the manufacturer may use the cottonseed himself for the production of cottonseed oil. In its turn the cottonseed oil which is again a manufactured article may be sold to one who manufacturers vegetable ghee for the purpose of being incorporated in the vegetable ghee. The Supreme Court further observed that in a case where the cottonseed oil manufactured by a person from cottonseed extracted by himself from cotton goes into the vegetable ghee the intention of the law is that sales tax may be paid on the manufacture of vegetable ghee and should not be paid either on the production of cottonseed or on the production of cottonseed oil which production become, in such a case, only steps in the manufacture of vegetable ghee. In this connection in the opinion of the Supreme Court section 4 of the Act introduces a device for ensuring that sales‑tax is paid only at one stage in spite of what is contained in the charging section and the sale by a licensed manufacturer of partly manufactured goods is not subjected to tax. In that case, their Lordships of the Supreme Court posed a question . . . what is to happen if a person himself manufactures goods and then incorporates them into another article? There is no sale of the first manufactured goods because the person producing them is only using them for manufacture of other goods. In the opinion of the Supreme Court the situation is met by section 3(6). In that context the Supreme. Court then observed:‑ "While it has to be accepted that the correct way of bringing a transaction within the definition of "sale" was to make a provision in the definition there can be no doubt at all as to the intention of the Legislature in subsection. (6). It has clearly been provided that all such transactions are to be regarded as sales for the purpose of this Act. At the same time if we do not regard this transaction as a sale subsection (6) (d) becomes wholly redundant for then no need will ever arise of assessing the value in a case where manufactured goods are kept by the manufacturer for his own use. In fact, it appears to us, that the Legislature, after getting this hint froth the Supreme Court, has already made suitable amendments in Law in this respect. We are respectfully bound by the law declared by the Supreme Court of Pakistan and in the face of the pronouncement in Messrs Noorani Cotton Corporation v. The Sales Tax Officer (supra) there is no alternative for us but to repel all these contentions forcefully advanced before us by the learned counsel for the petitioner. At one stage, in the course of the hearing, we were persuaded to hold that, perhaps, section 3(6)(d) was not applicable to partly manufactured goods and the term "such goods" in the context has reference to the finished goods produced or manufactured in Pakistan kept for own use by the manufacturer or producer. But it is difficult for us to sustain this contention in the face of the above pronouncement by the Supreme Court.

18. In view of the interpretation given to section 3(6)(d) of the Act by the Supreme Court in Noorani Cotton Corporation, rule laid down by the Dacca High Court in Latif Bawany Jute Mills case that a transaction to become taxable event must find mention in section 3(4) of the Act, cannot be considered as good law for the Supreme Court in that case, as already stated, considered the provisions of section 3(6)(d) of the Act also as charging provisions.

19. As regards Lahore cases of Commissioner of Sales Tax v. Crescent Textile Mills (supra) it would suffice to say that the same Division Bench of Lahore High Court in the case of Hunza Asian Textile & Woollen Mills Ltd., which was decided about 8 months after the decision in Crescent Textile Mills has held that Woollen Yarn produced from raw material and used in the manufacture of fabric was liable to tax under section 3(6)(d) of the Act. We have already quoted passage from this judgment and the submission that the provisions of section 3(6)(d) would be attracted only when a manufacturer or producer uses partly manufactured or produced goods independently and not when he assimilates or incorporates the goods into an article or produce was also noticed by the High Court and not accepted in view of the pronouncement of the Supreme Court in Noorani Cotton Corpora tion's case. Therefore, it is not necessary to deal with the submission in any greater detail.

20. It was however, argued by Mr. Ali Ather that there is a distinction between the liability or the charge to tax and its payability which was succinctly brought out by the Lahore High Court in the case of Commissioner of Sales Tax v. H. Muhammad Hussain & Co., Lahore 1974 P T D

20. But his argument lost all its force when the Supreme Court in Noorani Cotton Corporation's case regarded section 3(6)(d) of the Act as charging section.

21. As regards Commissioner of Sales Tax v. Shafiq Corporation 1914 P T D 15, it would suffice to say that the Supreme Court decision in the case of Noorani Cotton Corporation Ltd., was not considered in this case.

22. Out of the two cases on which Mr. Nasarullah Awan has placed reliance, the decision in Abbasi Textile Mills Ltd. v. Commissioner of Sales Tax (East), Karachi 1982 P T D 17 seems to follow the decision of the Supreme Court in the case of Noorani Cotton Corporation and has not followed Commissioner of Sales Tax v. Crescent Textile Mills Ltd. 1975 P T D 75 ; Commissioner of Sales Tax Rawalpindi Zone, Rawalpindi v. Shafiq Corporation Ltd., Gujral 1974 P T D 15 and Commissioner of Sales Tax, North Zone (West Pakistan) Lahore v. H. Muhammad Hussain & Co., Lahore 1974 P T D 20, which were relied .upon by counsel before the Division Bench of this High Court in that case.

23. In the other case of Messrs Paracha Textile Mills v. Commissioner of Sales Tax 1980 P T D 17 one of the two questions referred was "(1) Whether in the facts and circumstances of the case the Tribunal was right in holding that the applicant was liable to pay sales tax on ginned cotton purchased as partly manufactured goods without payment of sales‑tax and consumed in the manufacture of yarn which was latter exported ? " and dealing with the same, it was observed as follows :‑ "The effect of this Notification, read with section 7 of the Act, is to exempt cotton yarn sold outside Pakistan from sales tax. Now under section 4(a) partly manufactured goods are exempted from sales tax if sold by a licensed manufacturer. But the definition of "partly manufactured goods" makes it clear that only those goods are to be included in this clear ban, which are incorporated into and form a constituent or component part of an article which itself is subject to sales tax. Any cotton yarn sold outside Pakistan, by reason of the provisions of section 7 of the Sales Tax Act and the Government Notification reproduced above, cannot come under the expression "article which is subject to sales tax", and therefore ginned cotton used in the manufacture of such yarn cannot be treated as "partly manufactured goods", within the meaning of section 4(a) of the Sales Tax Act. If the definition of "partly manufactured goods" contained in section 2 (12) of the Sales Tax Act is kept in mind, then it would not be difficult to understand the order of the Sales Tax Officer and that of the Tribunal upholding the first order. Section 2(l) read with section 4(a) of the Sales Tax Act, read with the above Notification, which was issued under section 7 of the Act, effectively negative the assessee's claim for refund of sales tax on such ginned cotton as was used in the manufacture of yarn sold outside Pakistan, no exception can, therefore be taken to the order of the Sales Tax Officer and that of the Tribunal upholding this order. There is not much discussion in the two cases relied on by Mr. Awan and in our view there was no need in the face of the Supreme Court decision in Noorani Cotton Corporation. The Division Bench was bound to follow the same as we have."

4. Since no arguments other than those noticed in the Full Bench Judgment of this Court in Gul Ahmad Textile Mills have been advanced, we for the same reasons as given in the Full Bench Judgment find no merits in this petition and accordingly dismiss it in limine. M. B. A. Petition dismissed.