2004 PLP (Trib (PTD)

S.M. KAZIMI, MEMBER (TECHNICAL).

‑‑‑This judgment disposes of the appeal filed by Messrs Souvenir Tobacco Co. Ltd., against the Order‑in‑Original No.43 of 2001, dated 13‑3‑2001 (dispatched on 14‑3‑2001) passed by the learned Collector (Adjudication), Rawalpindi.

2. Briefly, the facts of the case are that while auditing the record of Messrs Souvenir Tobacco Co. Ltd., (hereinafter, called STC) the Audit Team of the Collectorate observed as hereunder:‑‑ "(A) Messrs STC suppressed their sales in the prescribed sales tax record by Rs.28,253,100 and Rs.34,723,526 during 1996‑97 and 1997‑98, respectively when the sales figures in 'sales tax record were compared with these in the published Annual Reports STC causing loss of sales Revenue of Rs.4,017,154 and Rs.3,858,169, ‑respectively, as follows:‑‑ 1996‑97 (Rs.) 1997‑98 (Rs) Sales, as per Annual Reports 78,320,313 90,817,510 Sales, as per S.T. record 51,853,171 57,429,504 Excess: 27,166,442 33,388,006 Add: retailers margin@4% 1,086,658 1,335,520 Total excess: 28,253,100 34,723,526 (B) Messrs STC did not charge and pay sales tax on wastes and scraps supplied during 1996‑97 and 1997‑98 causing loss of Revenue of Rs.491,547 (Rs.382,910 @ 18% and Rs.88,637 12.5%) and Rs.376,691 (@ 12.5%), respectively; (C) Messrs STC submitted their tax returns for 8 of 1996, 11 of 1996, 7 of 1998, 8 of 1998, 9 of 1998, 11 of 1998 and 2 of 1999 late as against the prescribed due dates causing liability of additional tax and penalties of Rs.361,426; (D) Messrs STC made inadmissible input tax adjustment on clearance basis rather than the prescribed procedure of purchase basis under section 7 of the Sales Tax Act, 1990: Thus STC made incorrect input tax adjustment of Rs.1,757,840."

3. The Additional Collector of Sales Tax, Peshawar, issued a notice C. No. ST(ADC) Adj: 104/2000/973, dated 31‑1‑2000 requiring Messrs STC to show cause why the aforesaid principal amount of Rs.10,481,401 should trot be recovered from them alongwith the additional tax (Rs.351,426 calculated .up to 15‑10‑1999) involved in terms of section 34 of the Act and also why penal action under section 33 of the Act should not be taken. After hearing Mr. Isaac Ali Qazi, Advocate on behalf of STC and Mr. Azizur Rehman, Sr. Auditor of the Collectorate, the learned Collector (Adjudication) passed the impugned Order‑in‑Original No.43 of 2001 wherein he:‑‑ (1) did not contest S.T.C.'s claim that the excess of supply as shown in the Annual Reports, is due to the vending job of drying of tobacco received from growers, which was returned to the said grower after doing the job on vending charges. However, the learned Collector held that such job of drying of tobacco was a process of manufacture and liable to sale‑, tax under C.B.R.'s C. No. 3(4) ST/98, dated 18‑6‑1999. The learned Collector (Adjudication) confirmed the demand of Rs.10,481,401 alongwith the additional tax due. A penalty equivalent to 5 % of the Tax due was also imposed; (2) confirmed the demand of Rs.848,238 (Rs.382,910 + Rs.88,637 + Rs.376,691) for. supply of wastes and scraps for the year 1996‑97 and 1997‑98 alongwith the additional tax payable thereon. A penalty of 5 % of the amount of tax was also imposed; (3) confirmed that an amount of Rs.154,709, (instead of Rs.351,426 as alleged in show‑cause notice) alongwith the additional tax, is due on late filing of returns is payable by Messrs STC. He also imposed a penalty of Rs.5000 for each month of late filing; and (4) confirmed that Messrs STC should pay the amount of input tax of Rs.1,757,840, irregularly adjusted, alongwith the additional tax due. A penalty equivalent to 5 % of the amount of taxi was also imposed.

4. During the course of hearing before us, the learned counsel for the appellant argued that the harvested crop of tobacco and the dried/cured tobacco both fall under the same P.C.T. Hdg 24.01 as "un manufactured tobacco". He explained that harvested tobacco is brought to Messrs STC by the growers for drying/curing and is returned to the growers after doing the job and charging the drying/curing charges. He cited Lahore High Court's judgment, dated 30‑11‑2001 in W.P. No. 1169 of 1992 (2002 PTD 776) where it was held that "Business of wholesale entailed both buying and selling of goods ...Sale of goods by their manufacturer could not, therefore, be termed as wholesale even though such sale might be made in large quantities". Based on this judgment, he argued that appellant's work as dryers/curers of few consignments of tobacco brought by growers cannot be termed as act of manufacture of tobacco or the principal business of the appellant. He further stated that such drying/curing (dying under sun or through manual labour) is also carried out tax‑free by some growers in their fields and, therefore, levy of sales tax on drying/curing by the appellant, on machines, will be discriminatory against the appellant. He pointed out that under item No.49 of the Constitution of Islamic Republic of Pakistan, the Federal laws could levy "Taxes on the sale and purchases of goods imported, exported, produced, manufactured or consumed" and, therefore, sales tax on un‑manufactured tobacco was ultra vires the Constitution. He further cited the case of Union of India v: Delhi Cloth and General Mills (AIR 1963 SC 791) where it was held that "Manufacture generally meant bringing into existence of a new substance, and does not mean merely to produce some change in substance, however, minor in consequence the change may be". He also cited Bholanath Sreemany v. Addl. C.C.T. (1978 42 STC 430 SC) which held that "Manufacture implies a change but every change is not manufacture and yet every change on an article is the result of treatment, labour and manipulation. But something more is necessary and there must be a transformation; a new and different article must emerge having a distinctive name, character, or use". He pleaded Thai drying/curing of tobacco was not liable to sales tax and, therefore, no amount is. payable on this account. As regards sales tax on wastes and scraps, the learned counsel for. the appellant clarified that these were not sale of scrap vehicles or scrap machinery. He, however, prayed that since disposal of wastes and scraps is not their business, they may not be asked to pay sales tax on wastes and scraps in the light of the judgment in the case of Messrs Nauras (Pvt.) Ltd. 2001 PTD (Trib.) 2590 and the Honourable Sindh High Court's judgment 2002 PTD 976.As regards late submission of returns, he sought forgiveness and mercy. As regards input tax adjustments made on clearance basis, he stated that there is no loss to the exchequer. He cited service judgments of the Tribunal, specially the one in STA/748/LB/2001, dated 5‑12‑2001, where the Lahore Bench of the Tribunal has allowed such adjustments after the due dates. He prayed for acceptance of appeal.

5. The learned D.R, argued that "curing" is covered by the term "production", and is a taxable activity. During the course of hearing on 20‑2‑2003, this Bench directed the appellants to produce relevant record of sales before the detecting officer who will inspect it alongwith Mr. Phool Badshah, Cost Accountant of the Collectorate. Mr. Phool Badshah was required to submit report whether the figures of drying/curing of tobacco by the appellant, as a vender, tallies with the figures of alleged excess production as made in the show‑cause notice. Mr. Phool Badshah submitted his report, dated nil which was presented before us on 7‑10‑2003 stating that un‑manufactured tobacco is classifiable under P.C.T. Hdg., 24.01 while manufactured tobacco is classified under P.C.T. Hdg 24.03 and that even after re‑drying it remains "un manufactured". His report also stated that it is confirmed that receipt of Rs.29,009,994 and Rs.35,500,003 during 1996‑97 and 1997‑98, respectively, were on account of re‑drying charges for tobacco. The learned D.R. was asked to confirm if the Collectorate owns the report of its Cost Accountant Mr. Phool Badshah about the status of "tobacco" after redrying. The learned D.R, stated that vide letter, C. No.3(41) STP/98, dated 18‑6‑1999, the C.B.R. has clarified that "Redried tobacco falls under P.C.T. Hdg 2401.1000 (H.S.). The process of re‑drying itself is covered within the ambit of term "manufacture of produce" as defined under section 2(16) off the Sales Tax Act, 1990". He stated that the Collectorate does not own Mr. Phool Badshah's report, which has been, submitted in response to a directive given by the Tribunal directly to Mr. phool Badshah. The learned D.R. further elaborated that the growers bring cured tobacco to the re‑drying plant where it is un‑packed, re‑dried, stem and leaf are repacked separately and delivered to the grower. In reply to a query, he accepted that harvested tobacco leaves and re‑dried tobacco, both, are classified under P,C,T. Hdg 24.01. He stated that the process of "cutting, packaging and repacking or preparation of goods in any manner" are the processes of manufacture under section 2(16) of the Act. As regards sales tax wastes and scraps, the learned counsel invited attention to several Judgments by various Benches of the‑ Tribunal where such wastes and scraps if not exempt under section 13 of the Act, have been held liable to sales tax. He argued that since these wastes and scraps are not those of fixed assets e.g., automobiles or machinery, these are to be subjected to sales tax on scrap/waste value. As regards late submission of tax returns, he argued that these additional tax and penalty are mandatory in nature and have to be paid. As regards the adjustment of input tax beyond tax period, he also argued that this too is not admissible. He prayed for dismissal of appeal.

6. Having heard the parties and on perusal of record of the case, we find that it is true that every product (goods) under the sun is liable to sales tax, unless exempted under the provisions of section 13 of the Sales Tax Act, 1990, or a notification issued thereunder. We have also no doubt that harvested tobacco is an agricultural produce and that S. No.2 of the Sixth Schedule to the Sales Tax Act, 1990, read with section 13(1) thereof exempts "Agricultural produce of Pakistan, not subjected to any further process of manufacture". The issue to be determined is whether the re‑drying process or curing process of un manufactured tobacco is a process of manufacture or not. Chapter Note to Chapter 24 of the World Customs Organization's Explanatory Notes to Harmonized Commodity description and Coding System (Second, Edition, 1996) states as hereunder:‑‑ "Tobacco is obtained from various cultivated verities of the genus Nicotiana of the Solanacee family. The size and shape of the leaves differ from one variety to another. The harvesting method and curing process depend on the variety (type) or tobacco. The plant may be cut whole, at average maturity (stalk cutting), or the leaves may be picked separately, according to their state of maturity (priming). Thus, tobacco may be cured either as whole plants (on the stalk) or as separate leaves. The various methods of curing are sun curing (in the open air), air curing (in closed sheds with free circulation of air), flue curing (in hot air flues), or fire curing (with open fires). Before packing for shipment, the dried leaves are treated in order to ensure their preservation. This may be done by controlled natural fermentation (Java, Sumatra, Havana, Brazil, Orient, etc.) or by artificial re‑drying. This treatment, and the curing, affect the flavour and aroma of tobacco, which undergoes spontaneous ageing after packing. Tobacco so treated is packed in bundles, bales (of various shapes), in hogsheads or in crates. When so packed, the leaves are either aligned (Orient) or tied in hands (several leaves tied together with a band or with another tobacco leaf); or simply let as loose leaves. They are always tightly compressed in order to ensure preservation. In some cases, in addition to (or instead of) fermentation, flavouring or moistening substances are added (easing) in order to improve the aroma or keeping qualities. This Chapter covers not only unmanufactured tobacco but also manufactured tobacco substitutes which do not contain tobacco."

7. Again under H.S. Code 24.01, the said Explanatory Notes states as hereunder:‑‑ "This heading covers: (1) Unmanufactured tobacco in the form of whole plants or leaves in the natural state or as cured or fermented leaves, whole or stemmed/stripped, trimmed or untrimmed, broken or cut (including pieces cut to shape, but not. tobacco ready for smoking). Tobacco leaves, blended, stemmed/stripped and "cased" ("sauced" or "liquored") with a liquid of appropriate composition mainly in order to prevent mould and drying and also to preserve the flavour are also covered in this heading. (2) Tobacco refuse, e.g., waste resulting from the manipulation of tobacco leaves, or from the manufacture of tobacco products (stalks, stems, midribs, trimmings, dust, etc.)".

8. Therefore, there is no doubt or dispute that harvested tobacco, cured tobacco and re‑dried tobacco are all covered by the terminology of "un‑manufactured tobacco" of H.S. Code 24.01. Although, these terms "un‑manufactured tobacco" and "rd‑dried tobacco" are not defined in the Sales Tax Act, 1990, section 2(13) of the Central Excises Act, 1`944, defines that "curing includes wilting, drying, fermenting and any process of rendering an un‑manufactured tobacco fit for marketing or manufacture". This shows that cured tobacco is still an un‑manufactured tobacco and not a manufactured tobacco. The main issue to determine is whether curing and redrying of this agricultural produce (tobacco) are processes of manufacture or not within the meaning of S. No.2 of the Sixth Schedule to the Sales Tax Act, 1990, read with the definition of manufacture as given in section 2(16) thereof. Section 2(16) of the Sales Tax Act, 1990, states that "manufacture" or "produce" includes:‑‑ (a) any process an which an article singly or in combination with other articles, materials, components, is either converted into another distinct article or produce or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process identical or ancillary to the completion of a manufactured product; (b) process of printing, publishing, lithography and engraving; and (c) process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner".

9. Here the harvested tobacco, cured tobacco, cut tobacco, stemmed tobacco, dried tobacco and redried tobacco is neither converted into any other distinct article or is changed, transformed or reshaped to make it capable of being put to use differently and distinctly. The tobacco, whether harvested, cured, but, dried or redried, remains an un‑manufactured tobacco and the process carried out are for preservation of the tobacco, for preservation of its aroma, for ease of packing, to prevent mould or drying and the reshaping (cutting, stemming, stripping, packaging, casing) is not for putting it to use any differently. All these processes are incidental or ancillary to prepare (not manufacture) the un‑manufactured tobacco fit for being manufactured into a manufactured tobacco or a smoking tobacco like cigarettes, cigar, cigarillos, cheroots, or smoking tobacco. We are of the view that unless the up‑manufactured tobacco commences the stage of conversion into a smoking tobacco (or manufactured tobacco), it cannot be called a transformation, conversion or change to, alter its character as an un manufactured tobacco. Neither any new article or new product is obtained by the processes of curing/redrying nor is the un‑manufactured tobacco converted into a manufactured tobacco. Even the commodity classification and coding does not change. Tobacco, before curing/redrying and even thereafter, remains classifiable under H.S. Code 24.01 as un‑manufactured tobacco. In even C.B.R.'s letter C. No.3(41) STP/98, dated 18‑6‑1999, it is stated that Redried tobacco falls under P.C.T. Hdg 2401.1000. However, we do not agree with the C.B.R. that the process of redrying is covered by the terminology "manufacture or produce" under section 2(16) of the Act. Both the words "process" and "manufacture" are distinct and the word "manufacture" essentially means to bring a new article into the market. Although, certain processes have been specifically included in the definition of manufacture i.e. at clauses (b) and (c) of section 2(16) of the Sales Tax Act, 1990, the process of curing, drying and redrying of un‑manufactured tobacco has not been included there. The processes of cutting, packaging and repacking, as used in clause (c) of section 2(16) do not affect the outcome of this case because these processes are carried on un‑manufactured products (un‑manufacture tobacco) and the products/article still, after such cutting/packing/repacking remain un manufactured products (un‑manufactured tobacco r‑without any change in use, nature, demand and clientele. For the reasons given in this paragraph, we agree with the appellant that the cured/redried tobacco being un‑manufactured tobacco of P.C.T. Hdg. 2401.1000 shall be exempt from the levy of sales tax as agricultural produce of Pakistan, not subjected to any further process of manufacture in terms of S.No.2 of the Sixth Schedule to the Sales Tax Act, 1990. We, accordingly, set aside the portion of the impugned order regarding sales tax, additional tax and penalty on the exempt supply of un‑manufactured tobacco (cured/dried/ redried tobacco) made by the appellant. As regards wastes and scraps, it is admitted by the appellant that these are not wastes/scraps of fixed assets like machinery/automobile. No specific exemption clause/provision/notification on such wastes/scraps has been produced by the appellant. We, accordingly, confirm the portion of the impugned order demanding sales tax, additional tax and penalty on the supply of taxable wastes/scraps. However, the additional tax accrued for the period 1996‑97 is remitted as a special case as it was not mandatory during that period. As regards the additional tax and penalty for late filing of tax returns, we confirm the portion of the impugned order in this regard too except that the additional taxes accrued up to June, 1997, is remitted as a special case being not mandatory leviable prior to that period. As regards the input tax adjusted beyond tax period, we set aside the portion of the impugned order in this regard on the ground that these adjustments were made prior to the 1998‑99 budget when the provisions of section 7(1) were amended to incorporate the words "tax period". The impugned order stands modified to the extent specified in this paragraph and the appeal stands disposed of accordingly.

10. This judgment, inter alia, shall also apply to the following 3 cases namely:‑‑ S. No. Appeal case No. Appellant's name Order‑in‑Original No. & date Counsel's name

1. ST.275/PB/03 Messrs Souvenir Tobacco Co. Ltd. Mardan 28/2003, dated26‑7‑2003 Issac Ali Qazi, Advocate

2. ST. 795/PB/2002 Messrs Standard Tobacco Redrying Inds. Ltd., Swabi Asstt. Collector, Sales Tax's Order of Compulsory Registration, dated 16‑8‑1999 ‑‑do‑‑

3. ST. 506/PB/2002 Messrs Mughul Tobacco Redrying Plant, Swabi Asstt. Collector, Sales Tax's Order of Compulsory Registration, dated 16‑8‑1999 ‑‑do‑‑

11. Inform all concerned.

12. Announced. C.M.A./38/Tax (Trib.) Order accordingly.