2007 PLP (Trib (PTD)

This appeal challenges the vires of the order dated 30-10-2000 passed by the Additional Collector of Customs, Sales Tax and Central excise Adjudication, Karachi-III.

2. According to the records, the facts of the case are that the appellant are the manufacturers of cotton yarn and cloth. They supply their product on payment of sales tax leviable thereon, invariably. The claim input tax on the raw material imported or locally purchased as it is used in the manufacture of taxable supply in accordance with section 7(1) of the Sales Tax Act, 1990.

3. An Audit Division of the Sales Tax Collectorate while conducting special audit of the appellant's unit, observed certain irregularities involving millions of rupees during the period October, 1997 to September, 1998 and reported the matter to the learned adjudicating authority. The learned respondent, thereupon, issued a show-cause notice dated 23-5-2000 alleging the evasion of sales tax on many counts including wrong adjustment of input tax on oils and spare parts used in the machinery utilized in the manufacture of taxable supplies.

4. The appellant replied the show-cause notice and successfully proved that the charges as levelled are unsubstantiated and nothing is due and payable. The learned respondent also came to the conclusion that no amount of sales tax is evaded and the show-cause notice was vacated to that extent. However, he could not reconcile himself on the issue of adjustment of input tax claim on purchase and import of oil and spare parts in terms of Notification 1307(I)/97, dated 20-12-1997.

5. The learned respondent vide its order-in-original dated 30-10-2000 directed the appellant to deposit a sum of Rs.202,887 under section 36 of the Sales Tax Act, 1990 along with unspecified additional tax chargeable under section 34 of the Sales Tax Act, 1990. He also imposed a penalty of Rs.10,144 under section 33(7) of the Sales Tax Act, 1990.

6. This appeal challenges the said order. The learned counsel appearing on behalf of the appellant contended that:

(a) the effective portion of the impugned order is based on the submissions of the departmental representative and the learned respondent has not applied his judicial mind. The referred para is reproduced hereunder for ease of reference; "...9. As regards allegations contained in paras. 8-12 of the show-cause notice, the departmental representative submitted that input tax adjustment on chemicals and packing materials amounting to Rs.549,548 is admissible and input tax already adjusted by the respondents on oil and spare parts amounting to Rs.202,887 is not admissible considering that oil and spare parts did not constitute integral parts of furnished goods in terms of S.R.O. 1307(I)/97, dated 20-12-1997. I therefore order...." From the above, it is crystal clear that the learned respondent has not given his own verdict on the issue and totally and completely depended on the submissions of the departmental representative. Thus the order becomes illegal and should be set aside ab initio. (b) the legal position of the admissibility of input adjustment on the subject items, we may refer to section 8(1)(b) of the Sales Tax Act, 1990, which disallows the adjustment of input tax on "goods which the Federal Government may by a notification in the official Gazette specify". The Federal fovernment did not specify any goods on which input tax adjustment shall not be admissible. S.R.O. 1307(I)/97, dated 20-12-1997 as referred to in the order-in-original, does not specify any goods and therefore, has no bearing or he case of the appellant. The subject S.R.O. was issued in supersession of S.R.O., 556(1)/96, dated 1-7-1996, which disallows adjustment of input tax on (i) vehicles and (ii) consumers durable of household type only. (c) the Honourable High Court, Lahore vide Writ Petition No.9272 of 1998,in cases filed by Messrs Shipping Mills Limited and others had held that: "....Keeping in view both the notifications in juxtaposition and reading with section 8(1)(b) of the Act, 1990, it is crystal clear that the respondent has authority only to collect sales tax qua the goods specified in the notification issued under section 8(1)(b) as reproduced above. It is fiscal matter, therefore, to be interpreted strictly. The second notification did not specify the goods, which is a condition precedent to collect the tax, therefore, the same is valid to the extent of goods specified in the first notification as the second notification was in continuation of it..." (d) the Central Board of Revenue, not being satisfied with the judgment of the Lahore High Court filed a Civil Petition in the Honourable Supreme Court of Pakistan. The Honourable Supreme Court, not agreeing with the contention of Central Board of Revenue and upholding the judgment of Honourable High Court, Lahore converted the petitions into appeals. It can easily be inferred from the judgment that the Honourable apex Court was of the view that statutory provisions would prevail upon the S.R.Os., section 8 of the Sales Tax Act, 1990 disallows input tax deduction only on such goods as are specified by the Federal Government whereas S.R.O. 1307(I)/97, does not specify any goods and therefore is ultra vires of law and is of no legal consequence. (e) the Central Board of Revenue, Islamabad, vide its Letter C. No.2(5)STP/99, dated 8-4-1999, while clarifying the contents of S.R.O. 578(1)/98, dated 12-6-1998 has clearly and in unambiguous terms stated that: "....Spares, lubricants for machinery producing taxable goods and textile printing screens producing taxable textile goods are not inadmissible for input tax credit under section 8 of the Sales Tax Act,. 1990 read with S.R.O. 578(I)/98, dated 12-6-1998, effective from 1-7-1998...."

7. Accordingly, the appellant pleads for the vacation of the impugned order.

8. The departmental representative on the other hand argued that in terms of S.R.O. 1307(1)/97, the input tax claim of the appellant was not justified.

9. The rival parties have been heard and case record examined. This issue was challenged before the Honourable Lahore High Court and their Lordships while going through the whole scheme of the' Sales Tax Act, 1990, concluded that:-- "...Keeping in view both the notifications in juxtaposition and reading with section 8(l)(b) of the Act, 1990, it is crystal clear that the respondent has authority only " to collect sales tax qua the goods specified in the notification issued under section 8(1)(b) as reproduced above. It is fiscal matter, therefore, to be interpreted strictly. The second notification did not specify the goods, which is a condition precedent to collect the tax, therefore, the same is valid to the extent of goods specified in the first notification as the second notification was in continuation of it...."

10. The said order of Honourable Lahore High Court was upheld by the Honourable Supreme Court, and ,the apex Court observed as under:-- ". .. Keeping in view both the notifications in juxtaposition and reading with section 8(1)(b) of the Act, 1990, it is crystal clear that the respondent has authority only to collect sales tax qua the goods specified in the notification issued under section 8(1)(b) as reproduced above. It is fiscal matter, therefore, to be interpreted strictly. The second notification did not specify the goods, which is a condition precedent to collect the tax, therefore, the same is valid, to the extent of goods specified in the first notification as the second notification was in continuation of it. The upshot of the above discussion is that the second notification is held valid to the extent of the goods specified in the first notification dated 1-7-1996. The petition is disposed of in the above terms...." ???????????

11. The issue was further clarified by the Central Board of Revenue vide their letter C. No.2(5)STP/99, dated 8-4-1999 in the following terms:

"??.Spares, lubricants for machinery producing taxable goods and textile printing screens producing taxable textile goods are--not inadmissible for input tax credit under section 8 of the Sales Tax Act, 1990 read with S.R.O. 578(I)/98, dated 12-6-1998, effective from 1-7-1998..."

12. The upshot of the above discussion is that by reading section 8(1)(b) of the Sales Tax Act, 1990, it is clear that the Central Board of Revenue had no authority to prohibit input tax adjustment on the disputed goods since the same were not specified in the Notification S.R.O. 1307(I)/97 and the provisions of section 8 were to be construed strictly, hence initiation of action against the appellant was ab initio wrong and not warranted by law. This appeal is accordingly allowed and the impugned order set aside. H.B.T./ I 85/Tax(Trib.)???????????????????????????????????????????????????????????? Appeal allowed.