2005 PLP (Trib (PTD)

S. M. KAZIMI, MEMBER (TECHNICAL-II).

This judgment disposes of the appeal filed by Messrs Pakistan Gums and Chemicals Ltd. against the portion of the consolidated Order-in-Original No.263 of 2001, dated 25-11-2000 despatched on 23-4-2001) relating to it as passed by the learned Deputy Collector (Adjudication-III), Karachi.

2. Briefly, the facts of the case are that while scrutinizing the audited reports for the period 1995-96 to 1997-98, of Messrs. Pakistan Gums and Chemicals Ltd., it was noticed that the said person had disposed of various old plants and machinery and fixed assets valued at Rs.7,397,163 as follows during the period from 10-1-1995 to 31-12-1998 without payment of sales tax involving Rs.303,182. (a) sale of old & used machinery as scrap on 12-3-1995 (for Rs.237,705) and on 16-11-1995 (for Rs.110,075) aggregating Rs.347,780: (b) sale of old and used air-conditioning plant on 23-10-1995 for Rs.12,000; (c) receipt of insurance claim of Rs. 25,000 for stolen motor-cycle; (d) sale of old and used furnitures on 15-7-1996 for Rs.6,360; (e) sale of 8 old and used motor vehicles, during 21-11-1995 to 10-10-1998, for Rs.1,702,500; and (f) write off value of Rs.6,835 on office equipments not yet sold or supplied.

3. The Deputy Collector issued a Notice C.No. 16(17)/ST/W/ Tech/2000, dated 25-5-2000 requiring Messrs. Pakistan Gums and Chemicals Ltd. to show cause why the principal amount of sale tax of Rs.303,182 should not be recovered from them alongwith the additional tax due and also why penal action should not be taken against them for the breach of the provisions of sections 2(33), 3, 6, 7, 16, 22, 23, 26 and 49 of the Sales Tax Act. The Deputy Collector (Adjudication) decided the case vide his impugned consolidated order-in-original No.263 of 2001 wherein he inter alia decided the case against Messrs. Pakistan Gums and Chemicals Ltd. and asked them, vide Sl. No.3 of the Table in paragraph 8 of the said order-in-original, to pay the sales tax of Rs.303,182 alongwith the additional tax in terms of section 34 and he also imposed penalties equivalent to 1.5%, 5%, 10% and 5% (sic) of the tax involved in terms of sections 33(2)(a),33(2)(cc), (33) (3) (b) and 33(7) of the Act. He also imposed a penalty of Rs.50,000 on the Chief Executive of Messrs Pakistan Gums and Chemicals Ltd. in terms of section 33(6) of the Act. Hence this appeal.

4. During the course of hearing before us, the learned counsel argued that the show-cause notice, dated 25-5-2000 is time-barred in terms of the limitation under section 36(2) of the Act as most of the findings (except for portion relating to sale of old 3 automotive vehicles sold on 2-9-1998, 4-9-1998 and 10-10-1998) relate to a period prior to 26-5-1997. As regards insurance claim and write-off of value, sub-pars (c) and (f) of paragraph 2 above, he stated that these are not taxable activity. As regards sale of old and used machinery (as scrap), old and used air-conditioning plant, old and used furnitures and old and used motorcycles, vide sub-paras. (a), (b), (d) and (e) of paragraph 2 above, he stated that these constitute sale of fixed assets and are not taxable in terms of the judgment of the Sindh High Court in the famous Novartis case 2001 PTD (Trib.) 2590. He prayed for setting aside of the impugned order and for acceptance of appeal.

5. The learned Departmental Representative opposed the appeal and stated that with the judgment of the Honourable Supreme Court of Pakistan in the case of Messrs Sheikhoo Sugar Mills and others v. Government of Pakistan 2001 SCMR 1376 = 2001 PTD 2097 the scope of taxable activity has to be seen as such and supply of taxable goods as result of ancillary processes are to be deemed to be taxable supply. He prayed that the appeal may be dismissed.

6. Having heard the parties and on perusal of record of the case, we find that by no stretch of imagination, the write-off of value on office equipments, as in sub-para (f) of paragraph 2 above, can be held to be taxable as there is no actual supply or transaction but only an entry for accounting purposes. Again, the receipt of amount of insurance claim, as in sub-para (c) of paragraph 2 above, on account of settlement claim of theft of an insured motorcycle is also not a taxable activity. The sale of such fixed assets (e.g. old and used furnitures and fixtures and old and used motorcycles, as in sub-paras (d) and (e) of paragraph 2 above) as are not admissible for input tax adjustment in terms of section 8 of the Act or a notification issued thereunder, is also not a taxable activity as has been held by the Honourable Sindh High Court in the Novartis case 2001 PTD (Trib.) 2590 followed by a series of judgments by the Tribunal. As regards/sale of old and used machinery as "scrap", this is a taxable supply because sales tax paid on machinery is entitled to input tax adjustment and also because the goods sold are a new and distinct product i.e. taxable scrap. Both the machinery and its scrap are distinct in description, PCT headings, use, clientele, customer and are 2 independent goods and the plant and machinery have been converted into a taxable scrap due to the taxable activity by the appellant. Besides the scrap of plant and machinery, the supply of old and used air-conditioners will also be taxable if this air-conditioner was of an industrial/ commercial size. However, the demand of sales tax on these goods sold on 12-3-1995, 16-11-1995 and 23-10-1995 is time-barred because show-cause notice was issued on 25-5-2000. Similarly, the time-bar clearly operates in case of most of the other goods, whether even otherwise held to be non-taxable supply. For the reasons given in this paragraph, we set aside the impugned order and the appeal stands disposed of as allowed accordingly.

6. Announced.

7. Inform all concerned. (Sd.) (ALI SAIN DINO METLO) (S. M. KAZIMI) MEMBER JUDICIAL-II MEMBER TECHNICAL-II

8. ALI SAIN DINO METLO (MEMBER JUDICIAL-II).

Though I agree with my brother learned Member Technical in allowing the appeal, I want to add a note of my own as I am unable to agree with him on the point of the chargeability of tax on the supplies of old and used machinery and air-conditioner of commercial size. In the opinion of the learned Member Technical, supply of the old machinery which was not useable as machinery and was sold as scrap was taxable due to the change of PCT heading from that of machinery to that of scrap and the supply of old air-conditioner of commercial size was taxable, as input tax on it was admissible. In this regard, it may be observed that after bringing trading into the net of sales tax, change of PCT heading has no relevance to the chargeability of tax. It was relevant when only manufacturing was within the scope of the tax. In the case of Collector of Customs, etc. v. Novratis Pakistan Ltd. reported in 2002 PTD 976 a Division Bench of the High Court of Sindh has clearly held that supply of fixed assets was not taxable when the registered person was neither trading in nor manufacturing such goods. For the purpose of charging sales tax under section 3(1)(a) of the Sales Tax Act, 1990, the supply must be in the course or furtherance of any taxable activity carried on by a registered person. Since the appellant was neither trading in nor manufacturing the machinery or the air-conditioner supplied by it, tax cannot be charged on such supplies, simply because the machinery was not useable as such and was sold as scrap and that the adjustment of input tax on the air-conditioner was admissible. Admissibility of deducting input tax from the output tax is a sort of rebate permissible under certain conditions. According to section 8 ibid. Adjustment of input-tax is not admissible if the goods on which it is paid are used or to be used for any purpose other than for the manufacture or production of taxable goods or taxable supplies made or to be made by registered person or the Federal Government by a notification specify the goods disallowing the input adjustment. It is thus clear that admissibility or otherwise of input tax adjustment has nothing to do with the chargeability of tax. Deduction of input tax from output tax is a right given to a registered person provided the same is not disallowed under section 8 ibid. As indicated by item 60 of the Sixth Schedule of the Sales Tax Act, 1990, introduced by the Finance Act, 2003, non-availability of input-tax adjustment is a ground for exemption of tax and not for its non-levy.

9. Since we both agree in allowing the appeal on the point of the show-cause notice being time-barred, there is no need to make reference under section 194-C(5) of the Customs Act, 1969 read with section 46 of the Sales Tax Act, 1990 and the appeal is accordingly allowed. C.M.A./381/Tax (Trib.) Appeal accepted.