2012 PLP (Trib (PTD)

These two appeals, one filed under the provisions of the Sales Tax Act, 1990 and the other preferred under the provisions of the Federal Excise Act, 2005, have been filed by a public limited company primarily engaged in the business of manufacture and upon of fertilizer products. Both these appeals impugn the findings contained in the consolidated appellate order dated 1-12-2011 passed by the first appellate Authority in respect of earlier appeals filed by the appellant challenging the order-in-original dated 21-5-2011 issued by the Assistant Commissioner Inland Revenue, Audit 02, Zone II, Regional Tax Office, Multan.

2. Brief facts of the case are that an audit of the sales tax and federal excise duty affairs of the appellant was conducted for the period July 2007 through December, 2038. It is a fact on record that the supply of fertilizer products was exempted from levy of sales tax through Notification S.R.O. 535(I)/2008 dated 11-6-2008 thus the supplies made by the appellant during the period July 1, 2007 to June 11, 2008 remained taxable whereas those made during the period following the issuance of the said notification and upto December 31st, 2008 principally remained exempt from levy of sales tax.

3. The audit proceedings culminated into certain observations on the basis of which the appellant was confronted vide a show-cause notice that as to why the sales tax and excise duty alleged to have been short paid be not recovered. The appellant duly responded to the show-cause notice, however, the Adjudicating Officer did not feel convinced by the defense put forth by the appellant as a result of which the observations confronted in the show-cause notice were enforced vide Order-in-Original No. 8 of 2011 dated 21-5-2011. Besides, the appellant was held liable to default surcharge under section 34 of the Sales Tax Act, 1990 and penalty under section 33 of the Sales Tax Act, 1990. The levy of special excise duty, confronted to the appellant in the show-cause notice, was also adjudged against the appellant together with liability on account of default surcharge and penalty. The appeals of the appellant before the first appellate authority also failed which has compelled the appellant to assail the same before this Tribunal.

4. We have heard both the representatives at length, perused the available record and have given earnest consideration to the material, including case-law, relied upon by the respective parties. In view of the fact that both the appeals impugn the consolidated appellate order of the first appellate authority, therefore, these are taken up and decided together in the ensuing paragraphs. (i) Input tax claim disallowed under section 8(1)(a)

5. The appellant's adjustment of input tax aggregating to Rs.10,301,693 was disputed on the grounds that goods (in respect of which input was claimed) was not admissible by reference to section 8(1)(a) of the Act. The items regarding which the claim of input tax was disputed comprised of consumables, stores, spares, diesel, computer accessories, office equipment, papers, lubricants, parts, stationery items, and paints etc., which are large in number.

6. Neither the order-in-original nor the impugned order describe the reasons on the basis of which it was concluded that the items in question were acquired for any purpose other than for taxable supplies and hence the claim for input tax was hit by mischief of provisions contained in section 8(1)(a) of the Sales Tax Act, 1990. When questioned on this, the learned DR argued that these items were not in the nature of raw material for the fertilizer products manufactured and supplied by the appellant and hence input tax remained inadmissible. The learned AR, on the other hand, reiterated the submissions earlier made before the authorities below and submitted that the input tax was fully allowable on the subject items, being for the purpose of taxable supplies. The AR also submitted that the subject provisions of law do not make any reference to raw materials and hence the contention of the DR is not sustainable. Under the law, according to the learned AR, input tax remains admissible on all goods which directly and indirectly relate to taxable supplies and in this regard relied upon few judgments.

7. We have observed that this issue has already been deliberated upon, at length, in numerous reported judgments some of which are 2002 PTD (Trib.) 475, 2004 PTD (Trib.) 681, 2008 PTD (Trib.) 261, PTD(sic) 2391, 2010 PTD (Trib.) 2144 and many others. More importantly, the issue of admissibility of input tax, regarding similar items, in terms of provisions of section 8(1)(a) has already been decided in appellant's own case by this Tribunal through orders in S.T.As. Nos. 707 and 89/LB/2009 dated 20-5-2010 and in M.As. Nos. 299 and 300/LB/2009 dated 19-10-2010. There being no difference in factual as well as the legal position vis-a-vis the present appeal and the decision earlier given in the appellant's case and also for the reason that the legal position on admissibility of input tax with regard to provisions of section 8(1)(a) is well settled in a number of decisions, we have no hesitation in vacating the orders of the authorities below on this point. The authorities below clearly erred in denying the adjustment to the appellant and their action being not sustainable under the law, the liabilities adjudged on this issue are cancelled being illegal. (ii) Levy of tax on in-house consumption of electricity

8. The adjudicating officer, through the order-in-original held that under the provisions of Notification S.R.O. 484(I)/2004 dated 12-9-2004, prescribing Sales Tax Special Procedure Rules, 2004, the appellant was required to pay output tax on its use of electricity in housing colony, stores, workshop, and other support departments. The first appellate authority confirmed the action of the adjudicating officer. In this respect, the learned AR, consistently with the defense taken before the first appellate authority, argued that the orders of the authorities below are ab-initio void and illegal being based on a legislation that was repealed through subsequent Notification S.R.O. 522(I)/2005 dated 22-6-2005 prescribing Sales Tax Special Procedure Rules, 2005. He further submitted that even the latter were repealed in the year 2006 when through another notification the Federal Government prescribed Special Procedure Rules, 2006. On this basis it was submitted that the appellant was illegally burdened with the liability on the basis of a legislation that was non-existent at the time of passing the order-in-original. It was also argued that even otherwise these rules related to producers who were in the business of selling the electricity and as such the subject rules did not apply to captive units. In short the gist of the arguments of the AR remained that:-- (a) the liability adjudged on the basis of repealed/rescinded legislation remain null and void in the eyes of law; (b) the notification was applicable only in respect of power companies engaged in the business of generation and supply of electricity and hence, in any case, was not applicable to the appellant being not a commercial power generation company; and (c) output tax is leviable on the electricity 'generated' by a taxpayer (power generation company) and the rules excluded the self-consumption of electricity by the electricity producer from the ambit of taxation.

9. On the basis of arguments of the learned AR it does not take long for us to decide the appeal on this point. In the admitted circumstances that the liability was adjudged against the appellant by relying upon the provisions of repealed SRO 484, therefore, departmental action is not condonable being based on a notification which did not hold field at the time of passing the order-in-original. The alternative arguments need not be taken for consideration. We are at a loss to understand as to how the first appellate authority approved such action. Thus, demand raised against the appellant is without legal authority and is hereby deleted. (iii) Self consumption of mid products/intermediary goods

10. This issue is involved in both the titled appeals and relates to the period after the fertilizer products had been exempted from levy of sales tax vide notification S.R.O. 535(I)/2008 dated 11-6-2008. The case made out against the appellant is that during the period when fertilizer was admittedly exempt from levy of sales tax, the self-consumption of in-house manufactured ammonia and nitric acid, constituted a supply which attracted levy of sales tax and special excise duty under the provisions of law. It was the contention of the department that no sales is levied on self-consumption where the end product remains subject to sales tax, however, where the end product is exempt from levy of sales tax the manufacture and consumption of intermediary goods constitute a supply which attracts the charge of tax. On this basis the appellant was charged to sales tax amounting to Rs.1,054,487,204 and special excise duty aggregating to Rs.65,905,450 together with default surcharge and penalty. In imposing the sales tax and special excise duty, the authorities below principally relied upon following judgments:-- (i) 2007 PTD 2410 (S.C.) (ii) PTCL 2006 CL (C.S.) (sic)/GST 2006 CL. 49(S.C.)/2006 PTD 730 (S.C.); (iii) 2007 PTD 2537 and (iv) 2004 GST 263 (H.C. Lah.)

11. In the context of the issue, the learned AR while deliberating on the relevant facts submitted that the appellant manufactures three types of products viz. 'urea', 'calcium ammonium nitrate' and 'nitro phosphate' and for all the three products the basic raw material is `natural gas' termed as 'gas feed' in the industry. The AR explained that industrial process for the manufacture of fertilizer is such that: (i) Urea the raw gas is first fed into the ammonia plant where ammonia is produced; which is then, within the system, transferred to urea plant where as a result of chemical reaction urea is manufactured, the end product supplied to customers; (ii) Calcium Ammonium Nitrate (CAN)

the raw gas is first fed into the ammonia plant where ammonia is produced; which is then, within the system, mechanically transferred to nitric acid plant; as a result of process that takes place in the system, nitric acid is produced; both ammonia and nitric acid are diverted to CAN plant where again a chemical reaction takes place as a result of which CAN is produced which is the end product supplied to customers; (iii) Nitro Phosphate. (NP) - the raw gas is first fed into the ammonia plant where ammonia is produced; which is then, within the system, mechanically transferred to nitric acid plant; as a result of process that takes place in the system, nitric acid is produced; both ammonia and nitric acid are then, within the system, diverted to NP plant where again a chemical reaction takes place as a result of which NP is produced which is the end product supplied to customers.

12. In order to clarify the facts and circumstances, involved in the matter, the learned AR also submitted the following pictorial demonstration of the process that takes place in the appellant's plant:--

13. On the basis of the aforesaid the learned AR submitted that the authorities below have erred in levying tax on the appellant as none of the provisions of Sales Tax Act, 1990 permit imposition of tax on process conversion that takes place in the manufacture of a product that involves continuous stage-by-stage process. Such process conversion/ continuous process the AR argued, does not constitute supply to attract levy of tax. It was submitted by the AR that reliance of the authorities below of decisions, refereed supra, is erroneous as the facts and circumstances, considering which the decisions were give, remain clearly distinguishable. The learned DR, however, opposed the arguments of the appellant and contended that the findings of the authorities below, being based on decisions of the findings of appellate courts, are unexceptionable.

14. We have given our earnest consideration to the facts of the case and have minutely examined the decisions relied upon by the authorities below. Sincere consideration has also been given to the arguments put forth by the respective parties as well as to the findings of the authorities below. In our view the fundamental issue to be decided in the subject appeals is whether the provisions of law, imposing charge of tax, bring in the ambit of supply the process conversions and / or transformations that take place mechanically in a continuous process; and whether the decisions of the courts relied upon by the authorities below are on all fours vis-a-vis the issue at hand.

15. The facts in the first decision, 2007 PTD 2410, relied upon in the impugned order were that WAPDA had set-up a printing press that was supplying computer stationery to the computer section/computer offices without payment of sales tax. A case was made out against WAPDA that this supply attracted sales tax. The apex court, by relying upon various earlier decisions, the foremost of which remained the decision in the case of Sheikhoo Sugar Mills Limited (2001 SCMR 1376/2001 PTD 2097), held that supply remained chargeable to sales tax as stationery was not exempt under section 13 of the Sales Tax Act, 1990.

16. In the second decision relied upon by the first appellate authority, PTCL 2006 CL. (sic) (S.C)/ GST 2006 CL. 49 (S.C)/2006 PTD 730 (S.C), the facts were that a ghee manufacturer, whose product was exempt from excise duty, had also put up a plant where plastic pouches, in which the product was packed, were produced. A caser was made out that such pouches were an independent product that remained chargeable to sales tax. The apex court, inter-alia by relying upon the decision in Sheikhoo Sugar Mills Ltd.'s case (2001 SCMR 1376 / 2001 PTD 2097), held that exemption from central excise duty and sales tax available to vegetable ghee would not exclude the production/manufacturing of polyethylene bags from the ambit of taxable activity or goods for the purposes of Central Excise Act and the Sales Tax Act;

17. In the third decision relied upon in the impugned order 2007 PTD 2537, the facts are somewhat similar to 2007 PTD 2410, discussed supra. In this case, Messrs PIA had a printing press where documents, calendars; schedulers, letter heads and miscellaneous stationery items were printed and supplied to various departments. It was held by the Karachi High Court that this constituted a taxable supply under the law and here again the reliance remained fundamentally on Sheikhoo Sugar Mills Ltd.'s case (2001 SCMR 1376/2001 PTD 2097).

18. The last judgment relied upon in the impugned order (2003 GST 263 (H.C. Lah)), is again based on decision in Sheikhoo Sugar Mills Ltd.'s case (2001 SCMR 1376/2001 PTD 2097) where the company was engaged in the manufacture of meal, which was exempt from sales tax, through processing oil seeds. A case was made out that in the process oil cake was produced which remained separately taxable as no exemption was available to the same. The Lahore High Court upheld the departmental stance and confirmed the imposition of tax.

19. Interestingly, all the cases relied upon by the first appellate authority in the impugned order while deciding the matter against the appellant are based on the decision of the apex courts in Sheikhoo Sugar Mills Ltd.'s case (2001 SCMR 1376/2001 PTD 2097). It would be, therefore, in the fitness of things if we also analyze the same, being the root document. The facts in this case were that during the period when sugar was exempt from levy of sales tax, the sugar mills utilized the bagasse, recovered in the process as a result of extrusion of juice from the sugarcane, as a fuel in the boiler which was charged to sales tax by the revenue on the plea that the exemption available to sugar was not available to the same, being an independent/identifiable marketable product and also capable of multiple uses. The apex court approved the revenue's stance. It would be beneficial if the relevant observations and findings, recorded by the apex court in arriving at above conclusion, are reproduced hereunder as these would not only elaborate the scheme of law but would also help is proper resolution of the dispute in the present appeals. The relevant excerpts of the decisions are as under:-- " . ....The above dictionary meanings of word "Bagasse" suggest that it can be termed as intermediary, marketable produce used as fuel for burning boilers containing juice of sugarcane or for making soft or hard building board...... ....The above definition clearly suggests that sugarcane during its extrusion produce Bagasse, which is admittedly capable of being put to use differently. Therefore, squarely it falls within the definition of manufacture . ....the Bagasse as it has been noted hereinabove in not a refuse liable to be thrown away but it is an intermediary product of sugarcane which is separately identified and can be used differently.......... if the raw material undergoes some change in the process of manufacture it cannot be equated with the finished product..... ....... It may be observed that this judgment has also not advanced the case of the appellants/petitioners in any manner because as it has been held that sugarcane after passing through the process of extrusion does produce an intermediary product known as Bagasse which has an independent identity, status and character known to the consumer and is also marketable in view of its utility as discussed hereinabove....... . in the instant case as for as Bagasse is concerned it was not to be assimilated in the production of sugar and its identity remained independent from that of end product i.e. sugar. As such sales tax was leviable on it being a distinct and different item capable of use for any other purpose unless exempted from the tax ........we are persuaded to hold that Bagasse is manufactured/ produced as a distinct and different intermediary product which can be supplied by the appellants/petitioners to themselves while preparing sugar and would be covered by taxable activity and nature of such supply would be that of a taxable supply as Bagasse has got its independent character and status....... ...... ...we are inclined to hold that Bagasse is an intermediary produce which is manufactured/produced during the process of extrusion of sugarcane to obtain juice by the appellants/ petitioners being registered persons and is consumed differently and distinctly as a fuel against the value which is to be calculated at market price excluding the amount of tax if its price is not otherwise determinable. As such it being a taxable supply in furtherance of taxable activity is liable to sales tax under section 3 of the Act......:(emphasis is ours (sic))."

20. An examination of the aforesaid excerpts from the decision of the apex court suggests that tax was held to be leviable on bagasse on the basis of following:-- (i) Bagasse was an intermediary product that was manufactured in the process of extrusion of juice from the sugarcane; (ii) Bagasse was an independently identifiable product that admittedly was capable of being put to use differently and remained marketable in view of its utility; (iii) Bagasse was not to be assimilated in the production of sugar and its identity remained independent from that of end product i.e. sugar; and (iv) Sales tax was leviable on bagasse being a distinct and different item capable of use for any other purpose unless exempted from the tax.

21. When the principles laid down and followed by the apex court are applied to the facts and process involved in the present case it transpires that both ammonia and nitric acid are stage-by-stage conversions of the basic raw-material in a manner that these remain within the continuous process and subjected to chemical reactions to produce the end product which is marketed by the appellant. To the extent these remain within the continuous process these meet the test of 'assimilation' laid down by the apex court and hence do not remain independently identifiable / marketable products, attracting the charge of tax. This is also evident from the fact that the matter, before the apex court, pertained to bagasse only. Had there been any confusion on stage-by-stage process conversion, there would have been a dispute with regard to 'juice' also, which was a different and distinct product from sugar. That was not the case as there has never been any confusion that stage-by-stage conversions of the basic raw-material in a continuous process do not constitute supply under the law. In case any fraction of ammonia and nitric acid is separated from the process, whether on account of same being surplus or otherwise, and sold in the market the same would clearly attract the levy of sales tax, because to this extent these are independently/identifiable marketable product, capable of being put to use differently. However, if these remain within the continuous process and get assimilated in the production of fertilizer products such consumption, under the scheme of law would not constitute supply leviable to sales tax.

22. The business process explained by the learned AR, and discussed above, is undisputed that in the case of the appellant; the impugned ammonia and nitric acid constituted stage-by-stage conversions of the basic raw material; these remained within the continuous process and subjected to chemical reactions to produce the end product; these got assimilated in the end product: hence these do not remain independently identifiable/marketable products, attracting the charge of tax under the provisions of law. The authorities below clearly erred in burdening the appellant with tax on this account. Likewise, no basis exists for imposition of special excise duty on the appellant. The levy is not justified in the facts and circumstances discussed supra.

23. In arriving at the conclusion as aforesaid, we have also been strengthened by the order 29/2007 dated 24-5-2007 issued by the Federal Board of Revenue in the matter of Alternative Dispute Resolution in the case of All Pakistan Solvent Extractors. Again, in this order, the matter was dealt with and resolved by reference to Sheikhoo Sugar Mills Ltd.'s case (2001 SCMR 1376/2001 PTD 2097). The members of the Association were producing oil and meal from oilseeds in a continuous process which were exempt from levy of sales tax. Cases were made out that intermediary products remained chargeable to sales tax. Based on recommendations, the Federal Board Revenue accepted the taxpayer's stance that no tax was leviable on intermediary products as these could not be used as independent product because these were not removed from the assembly line; and these were not identifiable as independent product. The case of the appellant is similar. The ammonia and nitric acid were mid products that remained within the continuous process where these were subjected to chemical reactions to produce the end product. These got assimilated in the end product, hence, under same principles, these are not independently identifiable/marketable products so as to attract the charge of tax under the provisions of law. We may add that the decision of Federal Board of Revenue is very relevant because the field officers are subordinate to the Board and any decision at this level constitutes the position applicable to all field officers. This is essentially required to be followed to maintain consistency and avoid discrimination.

24. We have observed that vide Finance Act, 2008 few major amendments were introduced in the Sales Tax Act, 1990 and inter alia the definitions of expression 'supply' and 'taxable activity' were redrafted to bring clarity in the legislation vis-a-vis the underlying intention. Such self-consumption, as is involved in the case of the appellant, neither in the past nor under the redrafted provisions constitutes supply to trigger the incidence of taxation. The expression 'putting to use......', as referred to therein, connotes to self utilization of the goods that a taxpayer manufactures in the course of business for onward sale, e.g. an automobile manufacturer brings into its own use some automobiles; an appliances manufacturer likewise consumes for its own use the product manufactured; cement manufacture consumes the product for own use etc. It does not bring into its ambit conversions of raw material that mechanically takes place within the process. The mechanical transformation of raw material and stage-by-stage conversions do not constitute supply.

25. For what have been discussed above, we are inclined to accept the appeal of the taxpayer on the point of imposition of sales tax and special excise duty on ammonia and nitric acid. The authorities below misinterpreted the law and misread the judgments of the courts in imposing the charge. The same is deleted. (iv) Violation of Notification S.R.O. 644(I)/2007

26. The adjudication officer disputed the appellant's payment of output tax at normal rates 15%/16% on disposal of its various scrap items and held that these items were subject to higher rate of tax i.e. 21% in terms of notification S.R.O. 644(I)/2007 dated 27-6-2007 ('S.R.O. 644'). The AR submitted that the items disposed by the appellant were not classifiable under the S.R.O. 644; accordingly, the demand raised was not sustainable. It was, however, pointed out that only two items i.e. 'plastic drums' and 'aluminum scrap' respectively valuing Rs.52,016 and Rs.625,500 were covered under S.R.O. 644; and appellant voluntarily accepted to discharge short fall of liability in respect thereof. In view of above explanations, the AR requested for the deletion of demand raised against the appellant in respect of remaining items.

27. The DR maintained the departmental stance and submitted that the liability adjudged against the appellant was justified. However when asked to identify where in the notification the disputed items were covered both the learned DR and the Audit Officer, accompanying him, could not pinpoint where any of the item would fall in the subject notification. The argument of the learned AR that the subject notification, being applicable to specific items, could not be extended to items not mentioned therein is unexceptionable. The disputed items, being clearly and obviously not covered by the notification, have been rightly charged to sales tax by the appellant at the applicable standard rate. Consequently, we feel inclined to accept the appeal on this point and hold that except for on two items stated above, the liability adjudged against the appellant is not sustainable under the law and hence the same is deleted. The appellant shall also remain liable to default surcharge attributable to these two items, however, penalty adjudged against the appellant is remitted, and there being no mens-rea/wilful default (v) Input tax on telephone bills

28. In the order-in-original, the adjustment of input tax by the appellant for Rs,19,709 'regarding telephone bills was disallowed by the adjudication officer on the grounds that it was hit by the mischief of provisions of section 8(1)(a) of the Act and input tax of Rs.54,419 was disallowed by reference section 7(2)(i) of the Act after observing that to this extent the telephone bills were not in appellant's name. The first appellate authority upheld the order-in-original while passing the impugned order.

29. The AR, regarding the observation of the adjudication officer vis-a-vis section 8(1)(a) submitted that the telephonic services were used for its taxable supplies and that appellant's claim remained in accordance with the Federal Board of Revenue clarification C. No. 2(77) STP/95(Vol.III) dated 3-9-2003. The AR argued that through such circular it was directed by the F.B.R. that input on telephone services is not hit by mischief of section 8(1)(a) of the Act, thus departmental action was not justified. Consequently, to this extent the liability adjudged against the appellant is annulled. Regarding the other observation, the AR argued that claim was bona fide as the appellant used the telephonic services and itself paid the related bills. The AR also relied upon GST 2002 CL 106 wherein it has been held that mentioning of incorrect particulars on utility bills is not a taxpayer's fault and hence it must not be penalized for an omission not occurring at its end. The AR also relied upon GST 2004 CL. 196 where it was observed that input tax adjustment is a statutory right, which forms basis of VAT mode of taxation, hence adjustment thereof should not be disallowed on technical grounds.

30. We find substance in the contentions of the appellant. The disallowance by reference to section 8(1)(a) remains clearly violative of instructions of FBR as well as the clear and unambiguous provisions of law. As discussed in the upper part of this order, the provisions of section 8(1)(a) do not favour the case of the revenue, hence the liability is annulled. On the matter of section 7(2)(i), the decisions relied upon by the appellant are relevant. Considering the overall facts and circumstances, we allow the claim on this account with the observation that the appellant shall approach the service provider promptly after the service of this order for correction of particulars and in future the adjustment would only be allowable if the particulars are rectified. (vi) Levy of output tax on disposal of fixed assets

31. Through the order-in-original, the adjudication officer held that appellant disposed asset valuing Rs.84,000 without payment of output tax. The AR submitted that the appellant only derecognized assets costing Rs.84,000 from its operating fixed assets (being no more fit for use) and stored the same in junkyard. According to AR this was not sold in the period under consideration. It was argued that the assessing officer picked that amount of 'cost' of asset (derecognized) from its fixed assets schedule (as appearing in note 21.1) of the audited financial statements for the year ended 31-12-2008 and treated it as disposal and that since no actual sale was made the output tax liability was not payable. We feel persuaded with the submissions of the AR that, in the context of the disputed transaction, under the law, sales tax is chargeable only if actual sale had taken place and mere placing of goods in junkyard does not attract levy of tax. Accordingly, on this issue we remand the matter to the adjudicating officer with directions that the records of the appellant are scrutinized to ascertain as to whether actual sale had take place. In case there was no sale no tax would be charged to the appellant on this transaction. Clearly, the liability to charge tax would arise at the time of actual sale, as and when the same takes place.

32. It is ordered accordingly. S.A.K./90/Tax(Trib.) Case remanded.