2003 PLP (Trib (PTD)

ZAFAR IQBAL, MEMBER (TECHNICAL). ‑‑‑This appeal has been filed against the order dated 31‑1‑2002, passed by the Collector of Sales Tax Adjudication, Karachi‑III.

2. The facts leading to the present appeal are that during 1996, for a brief period, the drugs and medicines manufactured by the appellant were liable to a levy of sales tax at the rate of 5% with effect from 1‑7‑1996 to 21‑10‑1996. The appellant accordingly followed the provisions of Sales Tax Act, 1990 and did pay sales tax at the specified rate on its products.

3. The appellant, in view of the provisions of section 7 of the Sales Tax Act, 1990 claimed input tax adjustment in respect of those materials which were purchased during that relevant tax period and were consumed in making taxable supplies. Thus in each sales tax return filed during July 1996 to September, 1956, the appellant while calculating its tax liability adjusted tax paid on its raw materials purchased and imported during the said period.

4. During July and August 2001, an Audit Team of the Sales Tax Department conducted an audit of the records of the appellant for the period from 1‑7‑1996 to 21‑10‑1996. As a consequence of the said audit, the Sales Tax Department demanded Rs.50,14,599 back from the appellant on the plea that since goods manufactured by the appellant stood exempt from payment of tax with effect from 21‑10‑1996, therefore, the claim of adjustment made during 1‑7‑1996 to 21‑10‑1996 by the appellant was not justified. Accordingly, a show‑cause notice was issued whereby the charge of wrong tax adjustment and commission of tax fraud were attributed against the appellant. The appellant, in reply denied these charges, however, the Adjudicating Officer did not agree with their point of view. He, accordingly, enforced the demand against the appellant alongwith fine and penalties. The said order has now been challenged through the present appeal.

5. We heard the rival parties and examined the case record. The case of the respondent is based on the ground that appellant wrongly adjusted the tax amount and, therefore, the show‑cause notice and subsequent order of adjudication were perfectly in order.

6. On the other hand; the case of the appellant is that: (i) the tax adjustment made by the appellant was perfectly in order, as the same was made in accordance with the provisions of section 7 of the Sales Tax Act, 1990. (ii) the order passed by the respondent amounts to retrospective application of the law passed on 21‑10‑1996, which was very much prospective in nature; (iii) the liability to pay tax under section 3(3) is on the person making taxable supplies. The appellant it will be noted while paying input tax was making any taxable supplies at the relevant time. Looking at the proposition from that angle as well, the appellant contends that the claim of input tax paid on the raw materials received by him was subject to adjustment or refund; (iv) the show‑cause notice is time‑barred.

7. On the basis of said arguments, the appellant pleaded for vacation of the impugned order.

8. As regards the issue of tax adjustment, the mechanism for the same has been provided in section 7 of the Sales Tax Act, 1990. For the case of reference it would be appropriate to reproduce these provisions. The same read as under:‑‑‑ "

7. Determination of tax liability.‑‑‑(1) For the purpose of determining his tax liability in respect of taxable supplies made during a tax period a registered person shall [, subject to provisions of section 73,] be entitled to deduct input tax [paid during the tax period] for the purpose of taxable supplies made, or to be made, by him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9. (2) A registered person shall not be entitled to deduct input tax from output tax unless. (i) in case of claim for input tax in respect of a taxable supply made in Pakistan, he holds a tax invoice in respect of such supply for which a return is furnished; (ii) in case of goods imported into Pakistan, he holds the bill of entry duly cleared by the customs under section 79 or section 104 of the Customs Act, 1969 (IV of 1969); [(iii) *****] [(iv) *****]"

9. A perusal of the said section indicates that a registered person is entitled to deduct input tax, during a tax period in respect of taxable supplies made or to be made during that tax period. The facts are not disputed to the extent that the appellant correctly adjusted tax paid on raw materials up to 21‑10‑1996, as at that time, all the raw materials purchased were meant for consumption in production of taxable supply. However, the claim of the respondent is that by virtue of subsection 1(a) of section 8, the appellant was not entitled to deduct input tax as after 21‑10‑1996 as he was not engaged in the production of taxable goods. It was further alleged by the respondent that on 21‑10‑1996 still a portion of raw material was in stock which was not used for the production of taxable supply. Therefore, in the opinion of the Department, the act of appellant, did fall within the mischief of subsection 1(a) of section 8 of the Sales Tax Act, 1990 and, therefore, in their opinion the demand raised by them was perfectly in order.

10. Whereas the appellant submits that section 7 of the Act supports out rightly their point of view that the claim of input tax for adjustment as well as for refund is co‑related only to the payment of input tax "paid during the tax period" and for the purpose of "supplies made or to be made." The purpose for which supplies were received and the amount of input tax paid having never been doubted, at least by the Departmental Authorities, their refusal to allow either refund or adjustment cannot be supported on any premises. The claim that input tax is related more to a tax period rather than the goods in relation to which it was paid is also supported by the provision of section 10 (excess amount to be carried forward or refunded) and section 11 (assessment of tax) of the Sales Tax Act, 1990.

11. According to section 7 a registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supply made or to be made by him from the output tax. The learned counsel for the appellant is correct in pointing out that the use of word "purpose" and "supplies made or to be made" are indicative of the fact that the payment of input tax is available for adjustment as well as refund not with regard to the input tax paid during the particular tax period. The negatives contained in section 8 were also improperly interpreted by the Departmental Authorities. According to subsection (1) of section 8, a registered person is not entitled to reclaim or deduct input tax paid inter alia on the ground that goods bearing input tax were used or to be used for any purpose other than for taxable supplies made or to be made by him. 'The goods on which input tax was paid by the appellant were intended to be used for taxable supplies. The intention of the appellant at the time of receiving the supplies and making and paying (input tax) was apparently to make taxable supply of them. It has never been the case of the Department that either the supplies were not received or that these supplies were covered by the negative list as given in section 8 of the Act. The only objection of the Department being that the goods for which input tax was paid were no more available for taxable supplies. While holding that opinion as noted earlier, the Departmental Authorities overlooked the use of word "purpose" and "supplies made or to be made", as used in section 7.

12. It is rightly pointed out in the order of the Sales Tax Authorities that the provisions of sections 7 and 8 of the Act are not charging provisions and that these are machinery provisions to crystallize the liability to pay the tax as contemplated in subsection (3) of section 3 of the Act. To co‑relate payment of input tax to the goods in question, in our way of thinking is not in accordance with the provisions of the Act. The interpretation of Departmental Authorities does not appear justified while placing stress more on goods in respect of which the input tax was paid rather than the amount of tax itself and the period during which it was paid. Section 7 of the Act supports out rightly the submissions made by the learned counsel for the appellant that the claim of input tax for adjustment as well as for refund is co‑related only to the payment of input tax "paid during the tax period" and for the purpose of "supplies made or to be made". The purpose for which supplies were received as also the amount of input tax paid having never been doubted, at least by the Departmental Authorities, their refusal to allow of either refund or adjustment cannot be supported on any premises. The claim that input tax is related more to a tax period rather than the goods in relation to which it was paid is also supported by the provisions of section 10 (excess amount to be carried forward or refunded) and section 11 (Assessment of Tax) of the Sales Tax Act, 1990.

13. It may also be noted that if the appellant paying input tax, on the, supply of goods received by him was not entitled to its adjustment or refund then he was not covered by the said charging provisions inasmuch as he never made taxable‑ supplies. Accordingly the interpretation made by the department becomes self‑defeating. In other words that mean that at the time of payment of sales tax, the appellant was engaged in making taxable supply. Therefore, the act of the input tax adjustment at the relevant tax period was perfectly in order. Accordingly, any change in law would not effect the accrued rights and past and closed transactions.

14. We are, therefore, of the considered opinion that the tax adjustment made by the appellant in the relevant tax period was perfectly in order as being in accordance with law. Be that as it may, the demand raised by the Department is not legally sound. In this regard, we are strengthened in our views, by the judgment of the Lahore High Court delivered in C.A. No. 66 of 1999 tiled as Mayfair Spinning Mills Ltd. v. Customs Excise and Sales Tax Tribunal wherein their lordships have interpreted the law exactly on the same lines as given in preceding para.

15. Another aspect of the case is that the demand raised by, the department is time‑barred. According to the facts available on record, the adjustment was made in 1996, whereas the demand was raised in August 2001. As per provisions of section 36 of the Sales Tax Act, 1990, the demand raised by the department is miserably time- barred.

16. In the light of what has been stated above, we allow this appeal and set aside the impugned order. S.A.K./525/Tax (Trib.) Appeal allowed.