M/s Karot Power Company (Pvt.) Ltd; H.10, St. 67, F-7/3, Islamabad. | Appellant | |
Vs | ||
CIR, Corporate Zone, RTO, Islamabad. | Respondent | |
Appellant By | Ms. Sadia Nazir, FCA | |
Respondent By | Mr. Shamshad Gul, DR | |
Date of Hearing | 24.07.2019 | |
Date of Order | 24.07.2019 |
M. M. AKRAM (Judicial Member): The titled appeal has been filed by the Appellant/Registered
Person against an Order-in-Appeal No.ST-220/2017 dated 17.12.2017 passed by the
Learned Commissioner Inland Revenue (Appeals-II), Islamabad on the grounds as
set forth in the memo of appeal.
2. Brief facts culled out from the record are
that the appellant filed an application for refund of input tax of
Rs.13,600,139/- for the tax periods April, 2016, June, 2016, September, 2016,
October, 2016 and December, 2016 as required under the first proviso to sub-section
(1) of section 10 of the Sales Tax Act, 1990 (the Act) read with Rule 26A (4)
of the Sales Tax Rules, 2006. It is also pertinent to mention that it is an
admitted fact that the appellant is a power generation plant which is still under
construction and for the time being, no taxable activity has been made so far. The
refund application was rejected by the Assessing Officer on the grounds that it
did not fulfill the basic criteria for refund i.e non-declaration of sales and
output tax, non-mentioning of zero-rated supplies, etc. Aggrieved of the
aforesaid treatment, the appellant preferred an appeal before the learned
Commissioner Inland Revenue(CIR) (Appeals-II) who vide order dated 17.12.2017
confirmed the treatment accorded by the Assessing Officer. Now the appellant
has assailed the impugned appellate order before this forum on a number of
grounds.
3. This appeal finally came up for hearing before
us on 24.07.2019, on the said date, the learned AR of the appellant vehemently
contended that both the authorities below have not properly appreciated the
submissions made by the appellant and have given wrong interpretation to section 10 (1) of the Act
which resulted in the wrong conclusion. The
appellant filed an application for a refund under the first proviso to
sub-section (1) of section 10 of the Act which duly allows it to claim excess
input tax against taxable supplies other than zero-rated or exports, according
to the said proviso, such excess input tax may be carried forward to the next
tax period, along with the input tax as is not adjustable in terms of
sub-section (1) of 8B, and shall be treated as input tax for that period and
the Board may, subject to such conditions and restrictions as it may impose, by
notification in the Official Gazette, prescribe the procedure for refund of
such excess input tax. She further submits that the learned CIR (A) has erred in
law in confirming the order of the Assessing Officer on the ground that refund
was admissible only where taxable purchases made during a tax period exceeded
output tax on account of zero-rated supplies or exports without considering the
fact that the appellant is a power generation plant which is under construction,
hence, there cannot be any output tax prior to generation of electricity.
4. On the contrary, the learned DR supported
the orders of both the authorities below and contended that without making
taxable supply, neither any input tax could be adjusted nor refunded. He,
therefore, prays for the rejection of the appeal.
5. We have heard the learned Counsel for the parties, perused
the record, and examined the relevant legal provisions. The
controversy involved in the present appeal is as to whether the refund of
excess input tax could be allowed to the appellant under the first proviso to
sub-section (1) of section 10 of the Act without making any taxable supplies by
it? The said
controversy between the parties revolves around the interpretation of the
different provisions of the Act and in order to assess and analyze those
provisions, it would be advantageous to reproduce them which are applicable:-
"3.
Scope of tax:- (1) Subject to
the provisions of this Act, there shall be charged, levied and paid a tax known
as sales tax at the rate of (seventeen) percent of the value of-
(b) goods
imported into Pakistan irrespective of their final destination in territories
of Pakistan."
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S.2(35)
"taxable activity"
means any economic activity carried on by a person whether or not for profit,
and includes-
(b) an
activity that involves the supply of goods, the rendering or providing of
services, or both to another person;
(c) a one-off adventure or concern in the
nature of trade; and
(d) anything
done or undertaken during the commencement or termination of the economic
activity,
But does not
include-
------------------------------
S.2(39) "taxable goods"
means all goods other than those which have been exempted under section 13;
S.2(41) "taxable supply"
means a supply of taxable goods made by an importer, manufacturer, wholesaler
(including dealer), distributor or retailer other than a supply of goods which
is exempt under section 13 and includes a supply of goods chargeable to tax at
the rate of zero percent under section 4;
Section 3(1)(a), which is a charging
provision, consists of the following components/constituents, the sales tax to
be levied and charged at the rate of (17 %) of the value of:-
(i)
taxable
supply made
(iii)
in
the course of furtherance of
(iv)
any
taxable activity
(v)
carried
on by him.
The
expressions used in section 3(1)(a) and which are relevant are (i) taxable
supply (ii) taxable activity, and (iii) in the course or furtherance of. Though
the first two, but not the latter one has been defined directly under section
2(41) and section 2(35) yet for proper appreciation of their meaning, one has
to revert to the definitions of goods, taxable goods, and supply. Goods mean
and include movable property other than money and securities etc. and taxable
goods means and includes the movable property other than those which have been
exempted from sales tax under section 13 of the Act, supply means a sale,
transfer and other disposition of goods in furtherance of business carried out
for consideration and also includes putting to private, business, or
non-business use of goods acquired, produced or manufactured in the course of
business and "taxable supply" means a supply of taxable goods other
than supply of goods which are exempted under section 13 of the Act.
6. It can be seen from the above legal
framework that sales tax on goods
under the Sales Tax Act, 1990 is paid under a value-added tax (VAT) mode. The
purpose of imposing a tax under VAT mode is to ensure that each taxpayer only
pays sales tax on the value it adds to a product or material. This is only
possible if each taxpayer can deduct the input tax it has paid on any goods
consumed, or services received, by it for the purposes of manufacturing,
producing, or marketing the goods it sells, from the output tax payable by it
on those goods. One of the essential features of VAT mode is taxation is the
passing on the input tax, to be credited against output tax, till the final
output tax is borne by the ultimate consumer under section 7(1) of the Act,
1990. Under this provision for the purposes of calculating its final tax liability,
a registered person is entitled to deduct input tax paid or payable during a
tax period for the purpose of making taxable supplies against the output tax
paid or payable by it for that tax period on those taxable supplies. The tax which is paid or payable by
the appellant at the time of purchases is called "Input Tax" as per
section 2(14) of the Act and is adjustable against output tax as per section
2(20) chargeable on the supplies of finished products. Thus, under the scheme of the Act, a
manufacturer is entitled to claim an input tax credit for sales tax on
purchases paid or payable by it against the output tax on the sales of its
products, which is payable to the Federal Government, in order to calculate its
final tax liability under Section 3 of the Act 1990.
7. Under the aforesaid scheme of the Act,
1990, the appellant in the instant case admittedly is still not in a position
to make any taxable supply till the final construction of the project which
according to the appellant would be completed on or before the years 2022.
After completion of the project, the appellant would be in a position to
produce electricity and supply thereof. Therefore, under the scheme of the Act
and as per our understanding, the credit of the input tax or refund cannot be
determined till such time the final tax liability as required under section 3
of the Act is not finalized. The appellant does not come within the ambit of the
charging provisions of section 3 of the Act till such time the taxable supplies
are not made by it in furtherance of any taxable activity. It is an essential
requirement that a person first has to come within the ambit of the charging
provisions of section 3 of the Act, thereafter, the machinery provisions such
as sections 7, 8, 10, and 11, etc would come into play. If there is no charge
on a person, the question of its determination of tax liability in the shape of
input tax credit or refund against output tax would not come into
consideration. The first proviso to subsection (1) of section 10 of the Act
clearly provides that in case of excess input tax against supplies other than
zero-rated or exports, such excess input tax may be carried forward to the next
tax period, along with the input tax as is not adjustable in terms of
sub-section (1) of 8B, and shall be treated as input tax for that period and the
Board may, subject to such conditions and restrictions as it may impose, by
notification in the Official Gazette, prescribe the procedure for refund of
such excess input tax.
8.
The net result of the above discussion is that the excess input tax credit or
refund shall be finally determined and assessed under the provisions of the Act
when the appellant starts its taxable supply under the provisions of the Act.
Hence, both the orders passed by the lower authorities are vacated and the
refund application is deemed to be considered as pending before the Assessing
Officer who shall decide the application afresh in accordance with law and
after giving an opportunity of being heard to the appellant when the appellant
start its production of electricity and supply thereof.
9. The
appeal of the appellant is disposed of in the manner as stated above. This
order consists of (05) pages, each page bears my signature.
|
Sd/- |
Sd/- (M.M. AKRAM) JUDICIAL
MEMBER |
|
(NADIR MUMTAZ WARRAICH) ACCOUNTANT
MEMBER |
|
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