2005 PLP (Trib (PTD)

MIR FUAD MEMBER (TECHNICAL-I).

This appeal has been filed against the impugned Order-in-Original No. 14 of 2004, dated 22-1-2004 passed by the learned Collector of Customs, Sales Tax and Central Excise (Adjudication), Karachi.

2. Briefly the facts of the case as reported in Order-in-Original are that:-- "it was reported by the Large Taxpayers Unit, Karachi that it was observed during scrutiny of record of Messrs Suzuki Motorcycles Pakistan Ltd., Karachi hereinafter referred as Registered Person), registered vide sales tax registration No.02-06-8711-002-19 that they have sold motorcycles on installment basis from company owned show rooms. However, the markup charged against instalment sales has not been included in the 'value of supply' for the purposes of assessment of sales tax as required under section 2(46)(a) of the sales tax Act, 1990 read with Sales Tax General Order 4 of 1997 relating to Board's ruling on inclusion of mark-up against credit sales in the value of supply for sales tax. The Federal Government through Finance Ordinance, 2001 amended the aforesaid section by adding a third proviso to the said section which provided that in case of instalment sale to a customer from general public on charging of mark-up or surcharge rendering the value higher than the open market price. The aforesaid amendment clearly indicates that only after July, 2001 mark-up was not required to be added for the purpose of calculating value of supply. As such non-inclusion of mark-up in the value of supply for sales tax, prior to July, 2001 has resulted in a short payment of principal amount of Sales Tax Rs. 4,164,558 as calculated in annexed work sheet. Messrs Suzuki Motorcycle Pakistan Ltd., also supplied spare parts free of cost against warranty claim. However, sales tax (output tax) required to be charged and paid in terms of section 3 of the Sales Tax Act, 1990, was not paid. The registered person has already claimed/adjusted 100% sales tax (input tax) paid on import of such spare parts worth Rs.13,64,546 have been supplied against warranty claims during the period 2000-2001 which resulted in short payment of tax principal amount of Sales Tax of Rs. 204,

681. There Sales Tax amounting to Rs. 2,04,681 and additional tax (to be calculated at the time of final payment) is required to be paid by the registered person under sections 36 and 34 of the Sales Tax Act, 1990 besides imposition of penalty under section 33 ibid. Messrs Suzuki Motorcycle Pakistan Ltd., Karachi were called upon to show cause to explain as to why sales tax and additional tax should not be recovered from them beside other penalties as envisaged under the aforementioned law."

3. Later, in consequence of adjudication the learned Collector of Customs, Sales Tax and Central Excise (Adjudication), Karachi passed the order impugned before this Tribunal.

4. The learned counsel for the appellant states that:-- (i) That the show-cause notice, dated 26-4-2003 was a time barred show cause in as much as the same was issued for the period of short payment of sales tax pertaining to the years, 1998-99 to 2001-2002 and the period of 3 years for issuance of show cause expired on 25-4-2000, as such for all the transactions prior to 25-4-2000 no short recovery can be made good in terms of section 36(2) of the Sales Tax Act, 1990. This proposition of law is based on the dictum laid down by superior Courts that when a show-cause notice is issued without any proper allegation as to a deliberate attempt, or collusion then it would be presumed that the same has occurred due to inadvertence, error or misconstruction on the part of tax payer and the limitation period of subsection (2) of section 36 will be applicable. It is also a settled proposition of law that a notice under sub-section (1) of section 36 (wherein a longer period of limitation of 5 years has been provided) must contain the allegation of collusiveness and without such allegation the notices would be defective and against the law. Therefore in the instant case as there is no specific allegation in the show-cause notice and merely the provisions of section 36 have been incorporated without any subsection , the limitation period expired on 25-4-2000 and no recovery can be made for transaction beyond this period. (ii) That by virtue of the mandatory conditions of subsection (3) of section 36 of the Sales Tax Act, 1990 the officer of sales tax is bound to consider the objections of the person served with a notice to show cause under subsection (1) or subsection (2), and thereafter determine the amount of tax or charge payable by that person. Therefore, when there is a mandatory condition provided within the statute to issue a show-cause notice either under subsection (1) or subsection (2), then the whole exercise of issuing a show-cause notice under section 36 without referring to any subsection is nullity under the law and liable to be set aside on this ground alone. (iii) That due to the above objection, without prejudice the amount of short recovery, if any, will not in any case exceed 2.5 million and in that case the proper jurisdiction to adjudicate lies with the Deputy Collector of Sales Tax (Adjudication) by virtue of powers vested under section 45(iii) of the Sales Tax Act, 1990 and not with the Collector of Sales Tax (Adjudication). Therefore, all the acts done by the Collector of Sales Tax (Adjudication) including the issuance of show-cause notice and passing of the impugned order are without jurisdiction, without any lawful authority and liable to be set aside on the basis of dictum laid down by the Honourable Supreme Court of Pakistan in the judgment reported as reported as PLD 1971 Supreme Court 124 in the case of Mansab Ali v. Amir and others. (iv) That even otherwise the impugned order could not have been passed by learned Collector as according to section 45B(1) of the Sales Tax Act, 1990 the orders passed by the officers below in rank to Additional Collector (that is the Deputy Collector) are appeal able before the Collector (Appeals) and for this purpose the Collector (Adjudication) has been appointed as Collector (Appeals) also, as such by passing the impugned order the learned Collector (Adjudication) has deprived the appellants one stage of appeal before the Collector (Appeals) which is illegal, mala fide, and liable to be set aside on this ground alone. (v) That even on merits of the case the learned respondents have erred in law by not applying the mind judicially as it must be appreciated that the provisions of section 2(46) is very clear and unambiguous in so far as sales made on instalment basis is concerned. The sales tax is chargeable on the basis of section 3 which is the charging section and the basic ingredients of section 3 are that there must be a taxable activity to effect a taxable supply and if any of these ingredients are missing them there cannot be any activity which would come within the ambit of section 3 of the Sales Tax Act, 1990. Since selling of motorcycles by charging mark up for deferred payment is not the principal activity of the appellants as such it cannot be termed as taxable activity and will be out of the ambit of the charging section 3 of the Sales Tax Act, 1990. (vi) That even otherwise if for a moment it is presumed without prejudice, that the contention of department is correct, even then the case of the appellant will be covered under sub-section (c) of section 2(46) of the Sales Tax Act 1990 which is reproduced hereunder for ready reference .(c) In case where for any special nature of a transaction it is difficult to ascertain the value of supply, the open market price From the bare perusal of this subsection it is clear beyond any shadow of doubt that if for some reason the value of supply is not determinable then considering this a special transaction the open market price will be the value of supply and in the instant case the appellants have charged and paid sales tax on the basis of the open market price. This can be further substantiated by the perusal of invoice. (vii) That in so far as the SGO 4 of 1997 issued by C.B.R. is concerned, it is respectfully submitted that no order can supersede or override the provisions of statute as sub-section 2(46) (c) is the part of Sales Tax Act, 1990, as such it has an overriding effect on any order which only has an administrative authority and cannot go beyond the substantive provisions of the statute and therefore this plea of the department is also not maintainable. Further it is needless to say that the Honourable Supreme Court of Pakistan has held in a number of cases that the adjudicating authority is not supposed to be bound by the orders of C.B.R. while performing Quasi judicial functions and only the officers in administrative functions are required to follow the orders of the C.B.R. (viii) That it is further pointed out that in the year, 2001 the department tried to collect sales tax on mark up from leasing companies and Banks, which were financing the purchase of cars and similar items. On immediate protest from them a clarification was inserted in section 2(46)(a) through Finance Ordinance, 2001 whereby a new sub-clause (iii) was added which reads as under ..In case a taxable supply is made to a consumer from general public on instalment basis on a price inclusive of mark up or surcharge, rendering it higher than open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax Since this clarification substantiates the stand taken by the appellants the same should have been followed in the case of appellants as well but this plea has not been allowed probably on the premise that the same will have prospective effect and will not apply retrospectively and the transactions prior to this amendment will not be covered. In this context it is submitted that since this is a beneficial legislation and the department has only clarified the lacuna in law, if any, as such by virtue of the dictum laid down by Honourable Supreme Court of Pakistan in the case of Army Welfare Sugar Mills Ltd. v. Federation of Pakistan reported as 1992 SCMR 1652 and followed by in the case of Elahi Cotton Mills Ltd. v. Federation of Pakistan PLD 1997 SC 582, the benefit of this legislation is a right of the appellants. (ix) That the department has in fact failed to appreciate the factual position and the way the appellants are functioning. The appellants perform two functions, firstly it is selling motorcycles by paying proper sales tax, and, secondly, it is providing funds to its customers and charging them interest/mark up from them. Since no sales tax is payable on charging interest as such the appellants are not paying the same. Further it is also pertinent to note that these funds are provided to the customers from the borrowed funds and the markup so charged from the customers in fact is to cover the interest payable on those borrowed funds and has got nothing to do with the price/value of the motorcycles which is very distinctively shown the sales invoice and that is why no sales tax is being charged or paid on the markup or interest being charged from the customers. It is further submitted that according to our knowledge no leasing/banking company has ever paid sales tax on markup and interest, therefore this also amounts to discrimination and is violative of Articles 4 and 25 of the Constitution of Pakistan (1973). (x) That in so far as the second allegation of the department is concerned it is submitted that the initial sale of motorcycle is under warranty for a certain period with a condition to replace defective parts free of cost and subsequently when there are any claims from customers the parts are replaced free of costs and such replacement are either done from the imported parts or from the vendors who had supplied those parts and in terms of contracts were bound to replace them if the same were found defective. Therefore in this situation this does not amount to taxable supply within the ambit of section 3 of the Sales Tax Act, 1990 and no sales tax is payable on such free of cost supplies. The departmental representative supports the impugned order for the reasons stated therein.

5. Rival submissions examined. Case record seen.

6. The appellant in this case is selling Motorcycles to the general public. The appellant however, in certain cases only, also provides funds as loan to some of his customers for this purpose and has been charging mark up on these loans. The department has relied upon the definition of value of supply and is demanding sales tax even on this mark-up. In order to resolve the issue, we would like to reproduce the definition of value of supply as enshrined in section 2(46) of the Sales Tax Act, 1990. It is as follows:-- "(a) in respect of a taxable supply, the consideration in money, including all Federal and Provincial duties and taxes if any, which the supplier receives from the recipient for that supply but excluding the amount of tax: Provided ." The reading of above would show that the value of supply is the consideration in money received by the supplier in respect of a taxable supply. Taxable supply is defined in section 2(41). It is as follows:-- "(41) "taxable supply" means a supply of taxable goods made by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4." The above definition states that taxable supply means a supply of taxable goods. The taxable goods are defined in section 2(39). It reads as follows:-- (39) "taxable goods" means all goods other than those which have been exempted under section 13." The above definition refers to goods. Goods are defined in section 2(12) which is as follows:-- "(12) "goods" include every kind of movable property other than actionable claims, money, stocks, shares and securities." The reading of above would show that money has been excluded from the definition of goods and hence the money supplied in shape of loan would not constitute a taxable supply and similarly mark-up received in respect of this supply would not be taxable. We are of the view that the mark up is related to cover the interest of the loan and is not related to the price of the Motorcycle. We further observe that the sales invoice of the appellant also shows that the value of Motorcycle and mark up in a distinctive manner. Thus mark up is not related to the value of Motorcycle and to our mind should not be subjected to tax.

7. We further observe that in the year, 2001 Finance Ordinance made an amendment in section 2(46)(a) whereby a new clause (iii) was added which is as under:-- "In case a taxable supply is made to a consumer from general public on instalment basis on a price inclusive of mark up or surcharge, rendering it higher than open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax." This clause supports our point of view which we have taken in the preceding paragraph. Not only this we further observe that this is a beneficial legislation and should be given a retrospective effect to the cases which are under consideration. We are fortified in our view by the judgment of the Hon'ble Supreme Court of Pakistan in the case of Commissioner of Income Tax v. Messrs Shahnawaz Ltd. vide 1993 SCMR

73. The Hon'ble Supreme Court in its judgment reproduced a passage from the judgment of the Sindh High Court with approval, which is as under:-- "In our view, as the amending provision under consideration had been inserted in subsection (6) of section 18-A to remedy a wrong that was being done to the assessee, and the amending provision does not affect any vested right or create any new obligations, the amending provision is to be given retrospective operation for extending benefit of the affected parties in pending cases, to give effect to the intent of the Legislature. As observed earlier, a wrong was being done to the assessees by providing for an indefinite period during which they were made liable for payment of additional tax at the rate of 2% per mensem and this wrong was sought to be remedied by the remedial and curative amendment brought about by the Finance Act, 1973. If the intention of the Legislature had been that this remedy should be available only in respect of assessment for the year, 1973-74 and subsequent years, the legislature would have used appropriate words to express such intention. No such appropriate words are mentioned in the amending provision. There is no reason why the remedial provision of the amending law should not be applied to pending proceedings. In fact, this appears to be the intent of legislature."

8. While respectfully following the above judgment we allow the appeal of the appellant on this count only.

9. The second charge relates to the non-payment of sales tax on the supply of spare parts against warranty claim. The appellant has taken the plea that the free of tax supply was made as replacement parts to the customers during the warranty period and that it was also included in the value of Motorcycle; thus these parts were already sales tax paid. The plea of the appellant is not tenable that the value of spare parts was included in the value of Motorcycle. The invoices issued for the sale of Motorcycles do not mention that spare parts are included in this value. Further spare parts are issued as a separate supply and since these are not exempted, sales tax must be levied on them. Besides, we observe that the appellant has already claimed/adjusted sales tax paid on the import of such spare parts. It is obvious that according to section 7 of the Sales Tax Act, 1990 this input adjustment is allowed only against the taxable supplies. Section 8(1)(a) of the Sales Tax Act, 1990 is also relevant in this regard. We reproduce this: "(8) Tax credit not allowed.

(1) Notwithstanding anything contained in this Act a registered person shall not be entitled to reclaim or deduct input tax paid on

(a) the goods used or to be used for any purpose other than for manufacture or production of taxable goods or for taxable supplies made or to be made by him; (b) (c) "

10. Thus in the absence of any exemption on the spare parts under section 13 of the Sales Tax Act, 1990 and in view of the fact that the appellant has already taken input adjustment of the sales tax paid on the import of these spare parts, we are of the view that no case has been made out by the appellant. The plea of the appellant on this count is thus dismissed.

11. The impugned order is modified to this extent only. C.M.A./382/Tax (Trib.) Order accordingly.