2003 PLP 800 (PTD)

8. On the main controversy in these cases, three different points of view have been expressed by the learned counsel appearing before us. The first, submitted by the learned counsel for the petitioner is that no sales tax at all is liable to be paid by the petitioners. The second expressed by the learned counsel for the respondents is that sales tax on the conversion charges on the manufacture of cigarettes by the petitioners have been properly demanded. The third view put forth by the learned counsel representing the Principal Companies who have been impleaded on the direction of the Court, is that the sales tax is chargeable on the retail price of the cigarettes at the time they are manufactured by the petitioners.

9. Elaborating his contention, the learned counsel for the petitioner submitted that under subsection (2) of section 3 of the Sales Tax Act (called the Act) read with the Third Schedule, sales tax on the supply of cigarettes is payable on the retail price, which is the price on which cigarettes are supplied by the Principal Company for further distribution and not the price for which the petitioners supply the cigarettes to the Principal Company after manufacture. It was argued that since sales tax is payable on the cigarettes whether at the stage of supply by the petitioners to the Principal Company or by the Company for further distribution, the stage at which tax is paid would not make any difference. The learned counsel pointed out that as a matter of fact admittedly the sales tax has been paid on the cigarettes regarding which the impugned show‑cause notices have been issued. It was, therefore, contended that further payment of sales tax on the conversion charges would amount to an additional tax, or in the alternative the same can be passed on to the principal company thus making no difference to the ultimate amount of tax paid or payable. As to the maintainability of the writ petition, the learned counsel submitted that since the show cause notice has been issued on the strength of Sates Tax General Order issued by the C.B.R. the Adjudicating Officer will be constrained to follow the instructions made therein and thus pleading by the petitioners their case before the Adjudicating Officer would be an exercise in futility. Reliance was placed on Messrs Julian Hoshang Dinshaw Trust and others v. Income Tax Officer and others (1992 SCMR 250) and Collector Customs, Customs House, Lahore v. Messrs S. M. Ahmad & Company (Pvt.) Limited, Islamabad (1999 SCMR 138).

10. The learned counsel appearing for the Customs Department responding to the above arguments, submitted that though the sales tax on the cigarettes manufactured by the petitioner is ultimately paid by the Principal Company at the time of its supply to the retailers, the stage at which the Sales Tax is chargeable does make a difference in that tax payable by the Principal Company and not by the petitioners would amount to delayed payment of the tax which may in certain eventualities cause loss to the public exchequer. The learned counsel argued that the instructions laid down in S.T.G.O. No. 1 were beneficial to the petitioner in the sense that at the time of making supplies to the Principal Company, Sales 'Tax would be payable on the conversion charges alone and not on the entire retail price of the cigarettes. That the tax paid by the petitioner would then eventually pass on to the Principal Company.

11. The learned counsel representing the Principal Company argued that manufacturing of the cigarettes is done by the petitioners and therefore, they are engaged in making taxable supplies within the meaning of subsections (33), (16) and (17) of section 2 of the Act and are therefore, liable to pay tax on the entire retail price under sub section (2) of section 3 of the Act read with the Third Schedule to the Act. He supported his el2iborate submissions made at the Bar by two authorities, Tandlian Wala Sugar Mills Limited v. Federation of Pakistan (2001 SCMR 1398) and F.S. Tobacco Company (Pvt.) Limited v. Superintendent Central Excise and Sales Tax (1995 PTD 874) a judgment of this Court.

12. The question to be determined is whether the petitioners can be subjected to sales tax at all for manufacturing cigarettes for the principal companies which provide all the raw material, and if so, whether they are liable to charge of sales tax on the retail price of the cigarettes or on conversion charges only. To determine these questions, reference is to be made to the relevant provisions of the Sales Tax Act (called the Act).

13. The charging provision in the Act is section 3 subsection (1) of which provides: "

3. Scope of tax.‑‑‑(1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as Sales Tax at the rate of fifteen per cent of the value of (a) taxable supplies made in Pakistan by a registered person in the course of furtherance of any taxable activity carried on by him; and (b) goods imported into Pakistan." "Supply" has been defined in subsection (33) of section 2 of the Act as under:‑‑‑ "(33) `supply' includes sale, lease (excluding financial or operating lease) or other disposition of goods in furtherance of business carried out for consideration and also includes:‑ (a) putting to private, business or non‑business use of goods acquired, produced or manufactured in the course of business. (b) ............. (c) ............. (d) ............." It will be seen that supply is not confined to sale transaction but extends to other disposition of goods in furtherance of business carried out for consideration, including manufacturing in the course of business. "Taxable supply" has been described in subsection (41) of section 2 of the Act to mean "a supply of taxable goods made by an importer, manufacturer ". The definition of "manufacturer" is given in subsection (17) of the same section which provides, "manufacturer" or "producer" means a person who engages whether exclusively or not, in the production or manufacture of goods whether or not the raw material of which the goods are produced or manufactured are owned by him and shall include ...." The process of "manufacture" has' been defined in sub section (16) of section 2 and undoubtedly the manufacture by the petitioner of the cigarettes and their packing in packets would fall within the broad definition of manufacture given in the Act and as stated in the definition of "manufacturer", the petitioner would still be manufacturers even if the raw material from which the cigarettes are manufactured are not owned by them.

14. From the definition of "supply", "taxable supplies" "manufacture" and "manufacturer", it is clear that the petitioners were making taxable supplies to the Principal Companies, even though for the manufacture of cigarettes sticks and packets, the raw material was supplied to them by the Principal Companies. The first requirement for the levy of Sales Tax under section 3 of the Act has thus been fulfilled by the petitioners. As for the second requirement as to whether the petitioners were making the taxable supplies in the course of taxable activities, one has to refer to the meaning of taxable activity provided in subsection (35) of section 2 of the Act. "(35) 'taxable activity' means any activity which is carried on by any person, whether or not for a pecuniary profit, and involves in whole or in part, the supply of goods to any other person, whether for any consideration or otherwise, and includes any activity carried on in the form of a business, trade or manufacture." "Taxable activity" thus essentially involves supply of goods to any other person, including activity in the form of manufacture. "Goods" have been defined in subsection (12) of section 2 to include every kind of movable property other than actionable claim, money, stock shares and security. Thus, the manufacture of cigarettes as well as its supply by the petitioners would constitute a taxable activity. The second element for the purpose of chargeability under section 3 of the Act is, therefore, also present in the petitioner's business activities. The petitioners are, therefore, liable to pay sales tax on the cigarettes manufactured by them for their Principal Companies.

15. The next point that calls for determination is the valuation for sales tax. Section 3 provides two modes of valuation for sales tax, one for goods generally and the other for taxable supplies specified in the Third Schedule, which shall be 15% of the retail price, to be printed or imposed by the manufacturer on each packet (see section 3 (2) of the Act). Cigarettes are one of the five items included in the Schedule. The petitioners, being manufacturers are to pay sales tax at the rate of 15% on the retail price of the cigarettes. We were informed by the learned counsel appearing for the Principal Companies that the raw material provided to the petitioners by these Companies includes packets on which the retail prices are duly printed. There is, therefore, no practical difficulty in finding out the retail price of the cigarettes. This Court has already held in the case of F.S. Tobacco Company v. Superintendent Central Excise and Sales Tax (1995 PTD 874) that under the arrangement between the Principal Companies supplying raw material and the manufacturer, manufacturing cigarettes out of the raw material to be delivered to the Principal Company sales tax becomes payable at the time of removal of the cigarettes from the factory. In that case the petitioner's plea that its factory was exempt from payment of sales tax was accepted, with the result that it was held not liable to pay the tax.

16. The impugned show‑cause notices were issued to the petitioners on the strength of Sales Tax General Order No.1 of 1998 (S.T.G.O. No.1). We, therefore, now have to examine whether the Order is in consonance with the provision of the Act discussed above. S.T.G.O. No. 1 itself states that it is being issued for clarification, information and guidance because of querries being made regarding chargeability of the Sales Tax on taxable supplies where raw material are supplied by the Principals to the vendors. The term "vendor" does not find mention in the Act. The S.T.G.O. No. 1 makes an attempt to bring in the petitioners activity within the definition of `service', but service itself has not been defined. The petitioner's activity is a taxable activity and it otherwise falls within the definition of "manufacture" given in subsection (16) of section 2 of the Act as discussed above. For the purpose of determining the value on which the vendor (petitioners) are to be charged to Sales Tax, the S.T.G.O. No.1 has referred to the definition of "value" given in subsection (46) of section 2 of the Act which states that "value of supply" is the consideration in money against which the, registered person supplies the goods. The order, therefore, instructs that the vendor (petitioner) is required to charge Sales Tax on the consideration/charges of conversion. It further goes on to state that this principle will apply even to goods chargeable to Sales Tax on the basis of retail price. In that case, the principal will pay tax on the basis of retail price whereas the vendor will be liable to pay Sales Tax only on the gross conversion charges. We agree with the contention of the learned counsel appearing for the Principal Companies that these instructions run contrary to the provisions of the Sales Tax Act. Under section 3(2) of the Act, as already stated in para. 15 above, Sales Tax is to be paid by the manufacturer, in the present case the petitioners, at the rate of 15 % on the retail price of exercise to approach the Adjudicating Officer fm redressal of grievance as he would feel bound by such instructions. to this context reference may also be made to a judgment of this Court in the case of F.S. Tobacco Company, (ibid). We thus, hold that the petitions are maintainable.

19. Resultantly, we would allow the writ petitions and struck down the impugned show‑cause notices on the ground that the same have been issued in violation of the express provisions of the Sales Tax Act. There shall be no order as to costs. M.B.A./647/P Petitions allowed.