2007 PLP (Trib (PTD)

ZAFAR UL MAJEED, MEMBER (TECHNICAL).

By this common judgment, I propose to dispose of 26 appeals cited in the title filed against consolidated Sales Tax Order-in-Original No.2 of 2006, dated 14-7-2006 passed by the Collector Sales Tax and Federal Excise, Gurjranwala. All the appeals involve identical questions of law and facts.

2. Briefly stated, the facts leading up to these appeals are that the appellants, in their capacity as sole distributors, purchased aerated water from Messrs Naubahar Bottling Company and supplied to un-registered persons (retailers) during the period 7 of 1999 to 6 of 2000 without payment of further tax @ 3% leviable under section 3(1A) of the Sales Tax Act, 1990 (hereinafter referred to as the Act). The appellants were accordingly charged with non-payment of further tax, non-maintenance of purchase/supply/inventory record and non-filing of sales tax returns under relevant provisions of the Act and after adjudication of the cases by departmental adjudicating officers, they were directed to pay the amount of further tax involved in the case of each appellant along with additional tax besides imposition of penalties under section 33 of the Act. On appeals against the adjudication orders, this Tribunal vide its judgment, dated 7-2-2002 in Appeal No. 962/LB of 2001, upheld the levy of further tax but remitted penalties and reduced additional tax by 50%. Appeals filed under section 47 of the Act were, however, accepted by the Lahore High Court and Tribunals judgment set aside. The department went in appeal against the judgment of the High Court; which was decided by the Honourable Supreme Court with the following direction:-- "Thus for foregoing reasons and in view of the consent given by the respondents learned counsel C.P. No.3733-L/2002 is converted into appeal and all the appeals are allowed, impugned judgments in the listed appeals are set aside, cases are sent back to the relevant/concerned Collectors of Sales Tax for the purpose of disposal of the matter of the respondents after providing them opportunity of hearing. Needless to observe that both the questions factual and legal shall be available to both the parties before the Collector and the judgments of the High Court, which are being set aside, will not influence the Collectors of Sales Tax in any manner and the decision shall be taken independently. The Collectors Sales Tax shall dispose off the matter expeditiously as far as possible within a period of eight weeks. Parties are left to bear their own costs."

3. In compliance with the above directions of the Supreme Court, the cases were adjudicated by the Collector Sales Tax and Federal Excise, Gujranwala who after conducting factual inquiries involved, decided the issue vide impugned order whereby the appellants have been held liable to pay further tax along with additional tax besides imposition of penalty equivalent to 3% of the amount of further tax involved under section 33(2) of the Act. However, in view of the fact that Peshawar High Court in its judgment titled Northern Bottlers v. Federation of Pakistan has held this levy unconstitutional and that department's appeal against it is pending in the Supreme Court, recovery of the adjudged amounts from the appellants have been made subject to final decision of the apex Court.

4. Through these appeals, the appellants have challenged the findings of the Collector on points of fact as well as law. It has been argued on behalf of the appellants: (1) That the rationale behind the levy of tax under subsections (1) and. (2)(a) of section 3 of the Act is different. While sub-section (1) provides for levy of tax, on the value of supply, subsection (2)(a) envisages the levy on retail price at which the goods are sold to the end consumer wherein supplies are taxed once and there remains no possibility of value addition there-after in the form of levy of further taxi Subsection (IA) relating to levy of further tax being an extension of subsection (1) is not applicable to a supplies covered by subsections (2)(a) which includes the aerated water business dealt with by the appellants. Deciding same issue the Peshawar High Court vide its judgment titled Messrs Northern Bottling Co. (Pvt.) Ltd. v. Federation of Pakistan (2004 PTD 2267) has held the provisions of section 3(1A) as ultra vires the Constitution. (2) That according to section 13 of the Act, supplies made to or by the retailers are exempt from levy of tax while the Collector has placed a narrow interpretation of the same by restricting the exemption to "supplies made by the retailers". (3) That the annual turnover of the retailers being less than rupees five million, they are not liable to be registered according to the provisions of section 14 of the Act and, therefore, imposition of levy of further tax on them is not lawful being punitive and arbitrary. C.B.R.'s clarification C. No. 1(229)STP/98, dated 4-11-1999 referred to by the Collector in the impugned order is not binding in the wake of the entry at S. No.42 of the Sixth Schedule to the Act which grants exemption from tax to retailers whose annual turnover does not exceed rupees one million. (4) That retailers supplied by the appellants have small business and are unregistered but the department has never charged them for evasion of tax or subjected them to compulsory registration. (5) That the inquiry conducted by the department was limited and centred around one of the exemptions provided in the proviso to subsection (IA) of section 3 of the Act while no factual inquiry into applicability of other exceptions provided therein was conducted in violation of the directions of the Supreme Court. (6) That without prejudice to the aforesaid contentions, additional tax and penalty are not attracted because the default was not wilful.

5. Learned D.R. assisted by Dr. Faisal Bokhari, Deputy Collector Sales Tax, Gujranwala defended the impugned order relying mainly on the Supreme Court's judgment in the case of Messrs Rehman Beverages (Pvt.) Ltd., and C.B.R.'s clarification, dated 4-11-1999 quoted in para. 12 of the impugned order.

6. I have gone through the facts on record and given careful consideration to the submissions made by both sides as well as the case lave referred to by them. Entire discussion during the course of arguments revolved around three points namely, vires of subsection (IA) of section 3 of the Act, chargeability of further tax on the appellants in the wake of exceptions/exemptions provided in the proviso to sub-section (IA). Sections 13 and 14 of the Act and factual inquiry conducted by the department in pursuance of the directions of the Supreme Court in its remand order. I will discuss all these points in the following paras.

7. The main issue i.e. legality of section 3(1A) of the Act has since been decided differently at various judicial fora. The appellants have quoted the judgment of Peshawar High Court titled Northern Bottlers (Pvt.) Ltd. v. Federation of Pakistan whereby this provision has been declared ultra vires. The department has challenged this judgment before Supreme Court where department's appeal is pending decision and as admitted by the D.R, operation of this judgment has not been suspended. However, prior to this, Supreme Court vide its judgment, dated 30-11-1999 upheld a judgment of Peshawar High Court whereby subsection (1A) of section 3 as introduced vide Finance Act, 1998 was declared illegal. Based on the same judgment, the Supreme Court vide another judgment in the case titled Tandlianwala Sugar Mills v. Federation of Pakistan (2001 PTD 2094) declared subsection (1A) as amended vide Finance Act, 1999, which held the field during the period relevant to appellant's case, as legal. Relevant para. 5 of the judgment is reproduced below for the facility of reference: "(5) Faced with this situation the learned counsel for the petitioners did not address arguments on the questions raised in the petitions and took the stance that he would be satisfied if further tax at the rate of 1% levied by Finance Act, 1998 is set aside. The stance is understandable in as much as the first amendment being technically defective was struck clown on the touchstone of the second amendment, which does not suffer from any legal infirmity. Consequently, the petitions are converted into appeals and partly accepted to the extent of further tax at the rate of 1% levied by Finance Act, 1998 and dismissed in respect of further tax at the rate of 3% levied by Finance Act, 1999. No order as to costs."

8. In the presence of the aforesaid judgment of Supreme Court, there is no dispute about legality of subsection (IA) of section 3 unless a decision contrary to this comes on the department's appeal pending decision in the Supreme Court.

9. Once the question regarding levy of further tax under sub-section (1A) is settled, the second issue that comes up is whether the appellants are entitled to any exemption/exception provided under sections 13 and 14 of the Act. The stance taken by the learned Collector is that exemption from payment of further tax is provided within the proviso to the subsection (1A). After giving due consideration to the arguments raised by the learned counsel, I find that the exemption in terms of section 13(1) as stipulated at S. No. 42(b) of the Sixth Schedule to the Act relates to supplies made by retailers whose annual turnover from supplies, whether taxable or otherwise, made in any tax period during the last twelve months does not exceed Rs.1 million. However, here the issue is not levy of tax on supplies made by retailers but by the appellants who are distributors making supplies to the retailers. Exemption under section 13 is, therefore, not relevant. As regards exemption from registration to retailers, whose value of supplies in any period during the last 12 months does not exceed Rupees five million, the appellants do have a point as if a retailer is not liable to be registered in terms of section 14(1)(ii), charge of further tax on him would be unjust and discriminatory, specially when under the tax on retail price scheme, he would not be able to pass on its incidence to the end consumers. While section 14(1)(ii) exempts a retailer with turnover less than five Million from registration, subsection (IA) straight-away provides for levy of further tax in case supplies are made by a registered person, the appellants in this case, to an unregistered person. The only exception to this, as provided in proviso (2) to subsection (IA), is if the supplies are made to a person whose income is not liable to tax under the Income Tax Ordinance, 1979 but has deducted income tax at source under subsection (4) of section 50 of the said Ordinance. There is, as such, an apparent conflict between the afore-mentioned two provisions of the Act. The appellants raised this point at original stage of adjudication as is evident from para. 7(ix) of the impugned order but learned Collector has not adverted to it and has restricted the scope of his factual enquiry to the parameters contained in proviso (2) to section 3(1A) of the Act.

10. There is a detailed judgment of Peshawar High Court (2004 PTD 2267) on these issues in the field whereby amendment in section 3(1A) of the Act through Finance Act, 1999 has been declared ultra vires of the Constitution. Department has filed appeal against this judgment which is pending decision before the Supreme Court of Pakistan. In view of this judgment, learned Collector, while raising the demand of further tax, additional tax and penally vide impugned order, has ordered to withhold recovery thereof until the final decision of the Supreme Court of Pakistan on this issue. I, therefore, find no reason to interfere with the impugned order to the extent of the amount of further tax adjudged at this stage.

11. The appellants' plea for remission of additional tax and penalty on the ground that the. default, even if further tax is finally held chargeable, was not wilful carries weight. This issue has been decided at different judicial fora including the Supreme Court of Pakistan, whereby it has been held that in case there is a controversy about interpretation of legal provisions and if the default is not wilful, imposition of additional tax and penalty is not justified. A judgment of this Tribunal 2002 PTD (Trib.) 300 and one of the Supreme Court of Pakistan 2004 SCMR 456 = 2004 PTD 1179 are referred in this regard. In the appellants' case, there was an obvious controversy about interpretation/vires of section 3(1A) of the Act, which persists even now. I, therefore, find that default on the part of the appellants was not wilful or mala fide. The additional tax and penalty in all the appeals are, therefore, remitted.

12. The appeals stand disposed of in the above terms and the impugned order is modified accordingly. C.M.A./39/Tax(Trib.) Order accordingly.