2006 PLP (Trib (PTD)

MUMTAZ HAIDER RIZVI, (MEMBER (TECHNICAL)).

This order disposes of an appeal filed by Messrs Tri-Pak Films Ltd., Karachi (hereinafter called as the appellants) against a consolidated Order-in-Appeal No. 320-25 of 2005, dated 13-6-2005 passed by the Collector of Customs, Central Excise and Sales Tax (Adjudication), Peshawar, whereby he upheld Order-in-Original No.5 of 2004, dated 27-5-2004 of the Deputy Collector of Customs, Central Excise and Sales Tax (Refunds), Peshawar.

2. Brief facts of the case are that the appellants filed an, application under section 66 of the Sales Tax Act, 1990 (hereinafter referred to as the Act) for refund of input tax amounting to Rs.838,600 paid on purchase of High Speed Diesel (HSD), left unadjusted in the relevant tax Period. Since the adjustment of input tax paid on purchase of HSD. was held not admissible in terms of Sr. No.(11) of S.R.O. 578(I)/98, dated 12-6-1998, a show-cause notice was issued to the appellants and after hearing the parties, the learned Adjudicating Officer rejected the refund under the said notification (which disallows input tax adjustment on goods acquired other than as "Stock-in-Trade") by holding that HSD used for generation of electricity cannot be termed as "Stock-in-Trade". Aggrieved by that order, the appellants assailed it before the learned Collector (Appeals), who along with other five cases of identical nature, dismissed the appeal mainly on the ground that HSD, not being a "Stock?in-Trade", attracts the mischief (and the bar) of S.R.O. 578(I)/98 and thus input tax adjustment is not admissible on the said commodity. Hence this appeal.

3. According to the appellants, they have filed this appeal mainly on the ground that the appellants purchased the HSD for consumption in their "power-house" i.e., for generation of electricity, which was used in the manufacture and production of taxable goods (and taxable supplies) made or to be made and thus the learned respondent has erred in law by not allowing the refund of input tax aggregating to Rs.838,600 on purchase of HSD on the ground that the same falls under the entry of Sr. No. 11 of S.R.O. 578(I)/98, dated June 12, 1998.

4. Having heard the parties and on perusal of the record, we find that input tax refund, in this case, has been denied in terms of a notification which derives its strength from section 8(1) of the Act. The said section reads as under:-- ["

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 the manufacture or production of taxable goods or for taxable supplies made or to be made by him; (b) any other goods which the Federal Government may, by a Notification in the official Gazette, specify; (c) the goods under subsection (5) of section 3. (d) fake invoices;-and (e) purchases made by such registered person, in case he fails to furnish the information required by the Board through a notification issued under subsection (5) of section 26.] (2) If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board. (3) No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him. [(4)****] (5) Notwithstanding anything contained in any other law for the time being in force or any decision of any Court, for the purposes of this section, no input tax credit shall be allowed to the persons who paid fixed tax under any provisions of this Act as it existed at any time prior to the first day of December, 1988. (6) Notwithstanding anything contained in any other law for the time being in force any provision of this Act, the Federal Government may, by Notification in the official Gazette, specify any goods or class of goods which a registered person cannot supply to any person who is not registered under this Act.

5. The Federal Government is duly empowered to issue a notification under clause (b) of subsection (1) of section

8. There would be no invalidity or illegality in issuance of such a notification and it would have the credibility of statutory instrument and would be read with its empowering statute and vice-versa. But a notification, so issued, should exactly reflect the idea as has been envisaged in its empowering statute. Therefore, when reading the Notification No. S.R.O. 578(I)198, dated 12-6-1998, we have to take into account the actual use of goods acquired in the context of section 8 of the Act. This becomes more imperative in this case as admittedly, the original notification issued on 12-6-1998 underwent seven subsequent amendments. It is also an admitted position that these modifications/amendments were either mandated by judgments of superior Courts and other quasi judicial fora or were made to redress grievances of the taxpayers and of mitigate difficulties encountered by them due to the mechanical approach of the department in interpreting the new law (which was in its earlier stages of evolution) and notifications issued thereunder.

6. According to section 7 of the Act, a registered person is entitled to deduct input tax during a tax period for the purpose of taxable supply made or to be made by him from the output tax. The learned counsel for the appellants contended that in the said section, use of the words "purpose" and supplies "made or to be made" are indicative of the fact that the payment of input tax on purchase of diesel is available for adjustments. The negatives contained in section 8 of the Act (and notifications issued thereunder) were improperly interpreted by the departmental authorities. The intention of the appellants at the time of purchase of diesel (and making payment of input tax thereon) .was nothing but to generate power through which the appellants could operate their machines for production of taxable goods (and its supplies thereafter). 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 either refund or adjustment cannot be supported on any premise.

7. We have reasons to believe that the new GST regime, as envisaged in the Act, is in the VAT-mode. Though due to certain aberrations, the GST is still far from that ideal (i.e., VAT). The Sales Tax, in the VAT-mode, is essentially a multi-stage levy and, in its basic character, is a tax on value addition (incremental) at successive stages. This system is designed to create a "chain" self-administered by the tax-payers and (only) overseen by the tax administration. The mechanism is self-policing and has been proved, globally, to be helpful in broadening the tax-base. Input-tax adjustment is an essential feature of the system and its denial would cause a breakage of the VAT-chain and may, eventually, quell the very purpose of VAT. (8). Section 7 of the Act is a benevolent and substantive provision of the Act, whereas section 8 ibid is clarificatory (rather some of its provisions are confiscatory) in nature. Purpose of section 8 ibid is not to override the provisions of section 7 ibid or to deny taxpayers their statutory entitlement, if otherwise due, but to create a check list to limit the right of input-adjustment within the four-walls of legitimate taxable activities. To go along with its spirit, the section 7 ibid is required to be interpreted liberally in favour of the taxpayer. Similarly section 8 ibid, carrying a confiscatory character, is to be interpreted restrictively, so as not allow the tax collectors to usurp the legitimate right of the taxpayer. (9). At this juncture, we cannot resist to refer to his lordship Justice Maulvi Anwarul Haq Judgment in case of Messrs Sheikh Spinning Mills Ltd. v. Federation of Pakistan and others, reported as 2002 PTD 2959 wherein correlation of the aforesaid two provisions with reference to the subject-matter of this Appeal has already been dilated upon. The pertinent paras. 8 to 11 of the said judgment are quoted, verbatim, as under:-- "(8) The question arises in these cases is as to whether the express provisions of substantive law can be nullified by the Federal Government by means of a notification which by all means is a sub-legislative measure. To my mind the answer to the said question must be in the negative as laid down by the Hon'ble 'Supreme Court of Pakistan in the said order of the Central Board of Revenue, Islamabad v. Sheikh Spinning Mills Limited, Lahore and others (1999 SCMR 1442). Chief Justice Ajmal Mian (as his Lordship then was) with reference to the earlier dictum in the case of Messrs Central Insurance Co. and others observed as follows in para-6 of the report:-- "It seems to be well-settled proposition of law that the Central Board of Revenue, or for that matter even the Federal Government, cannot control or curtail judicial adjudication power vested in the forums provided under the relevant law by giving a -particular interpretation to a particular provision of the relevant law or by issuing Notification/S.R.O. for that purpose." (9). Applying the said rule to the present case, once a registered person establishes that the goods in question on which input tax has been paid were used or to be used for the purpose of manufacture or production of taxable goods or for taxable supplies made or to be made by him, then subject to the terms of section 7 he becomes entitled to the deduction of the said input tax paid by him for the said purpose from the output tax that is due from him in respect of the particular tax period. (10). I am not inclined to agree with the said first and the third contention of the learned counsel for the petitioners. As stated by me above the purpose underlying sub-clause(b) of section 8(1) of the Act, is to enable the Federal Government to issue notifications which are clarificatory in nature without in any manner enhancing or curtailing the provisions of sub-clause (a) of the said section 8(1). An element of discrimination, therefore, does not come in. As to the said third contention of the learned counsel for the petitioners, apart from the fact that the same cannot be relevant to the controversy involved in these writ petitions, I find that the contention of Mr. Khan Muhammad Virk, Advocate that the said product may not constitute a stock-in-trade finds support from the said judgment in the case of Attock Cement Pakistan Ltd. v. Collector of Customs, Collectorate of Customs and Central Excise, Quetta and 4 others (1999 PTD 1892) being relied upon by the learned counsel. (11). In the light of the above discussion these writ petitions are disposed of with the direction that the petitioners to approach the competent Authority appointed under section 30 read with section 45 of the Act who shall give them an opportunity to prove or to demonstrate that the said product i.e., diesel on which they have paid input tax has been used or is to be used for the manufacture or production of taxable goods or for taxable supplies made or to be made by them. The said officer or authority shall then decide the question with reference to the substantive provisions of the Act referred to above as also the said S.R.O. 578(I)/98, dated 12-6-1998 and said provisions of law, it will be the said substantive provisions of the Act that will prevail??????

10. In the light of foregoing observations of the apex Court, it appears that the basis of departmental interpretation is contradictory to the spirit of VAT-mode GST mechanism. They have conveniently overlooked the most vital fact that the input tax paid by the appellants had already gone to the national exchequer. For the appellants, it is the input tax, payment of which is duly confirmed through invoices and corresponding returns of the suppliers, which either should be refunded to them or allowed to be adjusted. It falls for the departmental authorities to show and justify as to how they are justified to retain the money belonging to the appellants, if they are not ready to accept it as input tax. While the former is an admitted position the later is yet to be conclusively established by the respondents.

11. It is precisely for this reason that identical cases of admissibility (or otherwise) of refund/adjustment of input tax paid on HSD pending before various fora were settled in Alternate Dispute Resolution (ADR) Committees by mutual agreement of tax-payers and Central Board of Revenue. Accordingly, the C.B.R. has instructed vide its Letter C. No.2(1)ST-L&P/2000 (Pvt.), dated 21-12-2005, its field offices to allow refunds/adjustments of input tax paid on purchase of POL products fir generation of power used in the manufacture of taxable supplies and advised that all appeals in identical cases pending at various adjudicating/appellate fora or in the Courts of law be withdrawn in order to maintain uniformity and to avoid unnecessary litigation.

12. In view of the foregoing discussion we have no hesitation to direct that the input tax refund/adjustment shall be allowed on the said product i.e., HSD,(diesel), which has been used or is to be used for the manufacture or production of taxable goods or for taxable supplies made or to be made by the appellants. Resultantly, this appeal is accepted and the impugned order stands set aside.

13. Announced. H.B.T./57/Tax (Trib.)?????????????????????????????????????????????????????????????????????????? Appeal accepted.