APPELLATE TRIBUNAL INLAND REVENUE (HQs), DIVISION BENCH-1
ISLAMABAD
STA No.94/PB/2019
(Tax Period November, 2017 to June, 2018)
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O R D E R
M. M. AKRAM (Judicial Member): The titled appeal has been filed by the Appellant/Registered Person against an Order-in-Appeal No.08 of 2020 dated 16.07.2019 passed by the Learned Commissioner Inland Revenue (Appeals), Peshawar for the tax periods from November, 2017 to June, 2018 on the grounds as set forth in the memo of appeal.
2. Brief facts giving rise to the appeal are that during the course of audit of the appellant M/s Peshawar Electricity Supply Company Ltd (PESCO) for the tax periods from November, 2017 to June, 2018, it observed that the appellant has made taxable supply as well as exempt supplies, but the input tax relating to exempt supplies was not apportioned, which resulted into inadmissible input tax adjustment at Rs.1,650,543,547/- in violation of section 8(2) of the Sales Tax Act, 1990 (“the Act”) read with the Rule 24 of the Sales Tax Rules, 2006. The Assessing Officer issued the show cause notice to the appellant on the basis of the aforesaid reasons. In response, the appellant submitted its reply. However, the Assessing Officer being not satisfied with the explanation tendered by the appellant, passed the assessment order No.04/2019 dated 27.03.2019 whereby sales tax demand was created at Rs.1,650,543,547/- under section 11(2) of the Act along with default surcharge under section 34(1) and penalty @ 5% of the tax involved under section 33(5) of the Act. Aggrieved by the treatment accorded by the Assessing Officer, the appellant preferred the appeal before the learned Commissioner Inland Revenue (CIR), (Appeals), Peshawar who vide order dated 16.07.2019 confirmed the order of the Assessing Officer. Now the appellant has assailed the impugned appellate order before this Tribunal on a number of grounds.
3. This appeal finally came up for hearing before us on 21.01.2021, 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 wrongly considered the supplies made in FATA/PATA as exempt. He argues that the supplies made within the territory of FATA/PATA do not come within the ambit of the Act for the reason that the Sales Tax Act, 1990 has not been extended to FATA or PATA within the contemplation envisaged under Article 247(3) of the Constitution of Islamic Republic of Pakistan. It has been contended that none of the provision of the Act allow any exemption on chargeability of sales tax on supply of electricity in FATA/PATA, hence the assessing officer has erred in law in treating the supply as exempt and the appellant could not be deprived from its legitimate right of claiming the input tax under section 7 of the Act against the supplies made in FATA/PATA. The learned AR states that due to non-availability of column in the return, the non-taxable supplies made in FATA/PATA have been written in exempt supplies column. However, in such circumstances, just mentioning of these supplies in exempt column does not mean that the same is exempt under the Act. Further argued that this Tribunal vide judgment reported as 2015 PTD 1112 and in STA No.116/PB/2016 has already decided the same issue in favour of the appellant’s own case. He therefore, pleaded that the appeal be accepted.
4. In rebuttal, 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. Further submits that the appellant itself admitted that the Act has not been extended to FATA or PATA and none of the provision of the Act is applicable in such area that is why it could not be charged the sale tax from the recipients on the supplies made in FATA or PATA then how the appellant can be allowed to claim input tax against such supplies where there is no output tax. He explains that it is trite law that input tax can only be adjusted against output tax. The learned DR further pointed out with utmost respect that this Tribunal while deciding the earlier appeals of the appellant has not decided the main controversy of adjustment of input tax against supplies within FATA/PATA rather justified the action of the appellant’s declaration of supplies made in FATA/PATA in the column of exempt supplies as per sales tax return. It has been stated that the judgment reported as 2015 PTD 112 this Tribunal in Para 15 of the said judgment, at the end, it was observed that “……….such supplies have been declared as non-taxable by the courts of competent jurisdiction…….” He therefore, argued that if the supplies were non-taxable then the appellant was not entitled to claim/adjust input tax. Hence, he prayed for rejection of appeal.
5. We have heard both the parties, perused the record and examined the relevant legal provisions. In the light of the factual position narrated above, the controversial question arose between the appellant and the Sales Tax Authorities as to whether the appellant’s company was entitled to claim input tax under section 7 read with section 8 of the Sales Tax Act, 1990 against the supplies made in FATA/PATA? 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) per cent of the value of-
(a) taxable supplies made in Pakistan by a registered person in the course or furtherance of any (taxable activity) carried on by him; and
(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-
(a) an activity carried on in the form of business, trade or manufacture;
(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-
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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 per cent under section 4;
7. Determination of tax liability. – (1) Subject to the provisions of section 8 and 8B, for the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall, subject to the provisions of section 73, be entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made, or to be made, by him from the output tax excluding the amount of further tax under sub-section (1A) of section 3 that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9;
Provided that where a registered person did not deduct input tax within the relevant period, he may claim such tax in the return for any of the six succeeding tax periods.
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8. Tax credit not allowed. – (1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on--
(a) the goods or services used or to be used for any purpose other than for taxable supplies made or to be made by him;
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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:-
taxable supply made in Pakistan
by a registered person
in the course of furtherance of
any taxable activity
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 back to the definitions of goods, taxable goods, and supply. Goods means and includes 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. The legislature has cognitively used the word “means” while defining "taxable activity" in section 2(35) which is exclusive and exhaustive definition and do not provide room for any intendment. Similarly, expression "taxable supply" has also been defined using the word “means” and the words used therein need to be understood in the sense these have been used. Under the doctrine of ejusdem genris, words and phrases occurring in a provision of law are not to be taken in an isolated or detached manner, dissociated from the context, but these are to be read together and construed in the light of overall context of the provision of the law. Reliance may be placed on the judgments titled as Kashmir Pottery Works, Sialkot Vs Commissioner of Sales Tax, North Zone (Pakistan), Lahore, (PLD 1973 Lah 837).
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 feature of VAT mode 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 as "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, inter alia a manufacturer is entitled to claim 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 7 of the Act.
7. Before coming to the controversy, it is also settled legal position that the Sales Tax Act, 1990 (“the Act”) and the Income Tax Ordinance, 2001 (“the Ordinance”) have not been extended to FATA or to PATA, within the contemplation of Article 247(3) of the Constitution of Islamic Republic of Pakistan. It is a matter of record that, the Hon’ble High Courts, and the august Supreme Court have in the past rendered their valuable findings on the extent of applicability of the provisions of Act and the Ordinance, to persons carrying on business in FATA and PATA. The review of the said decisions, reveal that the views of the superior Courts have evolved with time. The Hon’ble Peshawar High Court in the case titled as M/s Taj Packages Company (Pvt) Ltd Vs Government of Pakistan and 6 others, (PTCL 2016 CL 402) has almost considered all the judgments and traced the stages of evolution in the judicial views, so rendered by the High Courts, and that of the august Supreme Court and the summary of the judicial pronouncements on core issues rendered, are as follows: -
“Supreme Court.
That the Ordinance and the Act have not been extended to FATA or PATA within the contemplation envisaged under Article 247 (3) of the Constitution.
Persons carrying on business and deriving income within FATA or PATA would not be liable to payment of Sales Tax and Income Tax under the Act and the Ordinance, respectively.
The principle laid down in Master Foam’s case (supra) cannot be borrowed and extended to a person carrying on business in FATA or PATA, as the Ordinance has not been extended to FATA or PATA.
The only exception to the general rule of exemption from payment of Income Tax under the Ordinance to a person carrying on business in FATA or PATA is when the said person extends its business beyond the territorial limits of FATA or PATA into the settled areas.
The Revenue has the authority under the Ordinance to carry out an inquiry to ascertain whether the person is carrying on business in FATA or PATA or has extended the scope of its business or commercial activities beyond the territorial limits of the said area into the settled area.
The final judgment in the field, which is to determine the applicability of the Ordinance, would be adjudged on the principles laid down in the judgment of the Apex Court in review of its decision in Gul Cooking Oil’s case, which was also confirmed in the decision of the Apex Court in Review of its decision in Mahsood Ghee Industries case.
High Court.
Sales Tax and Advance Income Tax is leviable at import stage from persons carrying on business in FATA or PATA.
Sales Tax paid at import stage is non-refundable to a person carrying on business in FATA or PATA.”
It is evident that the Act has not been extended to FATA or PATA therefore, none of the provision of the Act is applicable. Thus, the question of taxable or exempt supplies made in FATA or PATA do not arise.
8. Now we come to the main controversy as to whether the appellant’s company was entitled to claim input tax under section 7 read with section 8 of the Act against the supplies made in FATA or PATA? The admitted position in the case is that the Act has not yet been extended either to FATA or PATA within the meanings of Article 247(3) of the Constitution of Islamic Republic of Pakistan, 1973. There are number of authorities of the superior Courts on the point that when a law is not extended to a tribal area through notification by the President or the Governor, as the case may be, in the manner required by Article 247(3) of the Constitution, then no law or Act of the National Assembly or Provincial Assembly could legally be stated to have been extended to such areas. The supplies made by the appellant in FATA/PATA are not liable to pay sales tax because of non-extension of the Act in the said areas. Therefore, the argument of learned AR that part of the supplies made in FATA or PATA have been declared in exempt column but these are not actually exempt and there is no column earmarked in the form of the sales tax return does not convince us as declaration of non-exempt supplies in the return is not hindered in any way and the appellant could have easily declared such supplies as it has declared other supplies which are admittedly taxable. Therefore, we take the argument of learned AR that the supplies under controversy were not exempt an attempt to justify credit of input tax and we disagree with that. We are afraid that in arguing so, learned AR’s view is in direct conflict with the provisions of Article 247(3) of the Constitution of Islamic Republic of Pakistan, 1973.
9. Under section 3 of the Act, sales tax is liable to be charged, levied and paid at the rate of 17% of the value of taxable supplies made in Pakistan (excluding FATA/PATA the Act being not extended to such areas) by a registered person in the course or furtherance of any taxable activity carried on by him and goods imported into Pakistan. The charge is restricted only against taxable supplies made in the area where the Act is applicable/ extended. Admittedly the supplies have been made in FATA/PATA, to which none of the provision of the Act can be attracted as the Act has not been extended to such territory. If the provisions of section 3 of the Act regarding charge of tax do not apply on supplies made in FATA or PATA, then the provisions of sections 7 and 8 of the Act regarding claiming credit of the input tax incidental to such supplies will equally not apply. Therefore, the appellant cannot claim the credit of input tax against the supplies made in FATA or PATA. Since the Act has not been extended to tribal area, the appellant is not chargeable to sales tax in respect of supplies made in FATA/PATA. "Taxable goods" are those goods which are supplied in areas to which the provisions of the Act are applicable/extended and which are not expressly exempt under section 13 of the Act. Sales Tax is leviable in relation to taxable supplies made in Pakistan or goods imported into Pakistan. Goods being supplied in the tribal areas cannot be classified as taxable goods.
10. Section 7 of the Act entitles any registered person to adjust any sales tax paid at import stage or at the time of local purchase against his liability at the time of supply i.e. "output tax" and pay the difference, if any. The difference paid as such is recoverable from the recipient of such supplies and the ultimate burden of sales tax is borne by the consumer being an "indirect tax" and so also term as "pass through item". In the instant case admittedly no output tax is leviable at the time of supplies made in tribal areas therefore, the appellant is neither entitled to adjust input tax against "output tax" nor entitled to claim refund. Entitlement of input tax adjustment or refund to the registered person is restricted to registered person making taxable supplies. Under section 3, the charge is also restricted on those persons who are engaged in making taxable supplies, i.e. engaged in "taxable activity" in areas where provisions of the Act are extended/applicable. We have also considered the judgments relied upon by the learned AR, the submissions of the learned DR have substance that this issue has not been decided by this Tribunal rather justified the action of the appellant’s declaration of supplies made in FATA/PATA in the column of exempt supplies as per sales tax return. With respect this Tribunal was earlier not given conclusive judgment on the main issue i.e admissibility or otherwise of input tax vis-à-vis supplies made within FATA or PATA under the Act. In the earlier judgment of this Tribunal reported as 2015 PTD 1112 it was observed in Para 15, at the end, that “……….such supplies have been declared as non-taxable by the courts of competent jurisdiction…….” It clearly means that these supplies are non-taxable which in turn means that these are immune from the chargeability and collection of tax.
11. For what has been discussed above, the action of the department by prorating the total input tax in between taxable and non-taxable supplies is quite justified and in accordance with law. Consequently the orders passed by the lower authorities are maintained and the appeal of the appellant is rejected being devoid of merit.
12. This order consists of (10) pages and each page bears my signature.
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