M/s Foundation Wind Energy-I (Pvt) Ltd. Vs Commissioner Inland Revenue, Corporate Zone, RTO, Rawalpindi.

 APPELLATE TRIBUNAL INLAND REVENUE, DIVISIONAL BENCH-I,

ISLAMABAD 

STA No.24/IB/2020

(Tax Period Jan. 2014 to Feb. 2019)

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M/s Foundation Wind Energy-I (Pvt) Ltd. 68-Tipu Road, Fauji Foundation Head Office, Chaklala Cantt.		Appellant
	VS
Commissioner Inland Revenue, Corporate Zone, RTO, Rawalpindi.		Respondent
Appellant by		Mr. Aazar Abdul Hameed, FCA
Respondent by		Mr. Babar Chohan, DR
Date of hearing		31.03.2021
Date of order		31.03.2021

O R D E R

M. M. AKRAM (Judicial Member): The titled appeal has been filed by the Appellant/registered person against an Order No.120/2019-20 dated 21.01.2020 passed by the learned Commissioner Inland Revenue (Appeals-III), Rawalpindi on the grounds as set forth in the memo of appeal. 

2.       The facts, in brief, are that the Appellant Company is engaged in the business of manufacturing and sale of electricity generated through a wind energy power plant. Subsequently, it transpired that the appellant claimed input tax paid on insurance services availed by them for insurance of plant and machinery for the tax period January 2014 to February 2019 amounting to Rs.40,153,325/- against output tax which was not admissible under section 8(1)(a) and 8(1)(f) of the Sales Tax Act, 1990 (“the Act”). Accordingly, a show-cause notice was issued to the appellant for recovery of allegedly wrongly availed input tax amounting to Rs.40,153,325/- in respect of insurance services during the aforesaid tax periods along with default surcharge under Section 34 and also for the imposition of penalty on the appellant under section 33 of the Act. 

3.       The show-cause notice was adjudicated by the Deputy Commissioner Inland Revenue (DCIR) by an order-in-original No.08 of 2019 dated 01.08.2019. Though in course of proceedings before the DCIR, the appellant inter alia cited the judgment of the Tribunal reported in PTCL 2012 CL 475 wherein it was held that the expression “purpose” used in section 7(1) of the Act has a very wide application and according to the dictionary meaning the same refers to what something is supposed to be achieved. Therefore, the appellant contended that the payments in respect of which input tax was claimed exclusively represent the costs incurred by the company for the exclusive purpose of its taxable business activity. The credit of input tax in respect of those taxable services is to be allowed which go to form part of the assessable value on which sales tax is charged and pleaded that the cost of insurance of plant and machinery is part of the assessable value of the goods on which sales tax has been paid and also cited judgments reported in PTCL 2004 CL 114 and PTCL 2013 CL 534  wherein it was held that input tax credit in relation to purchases made of goods shall not be admissible if these are procured for maintenance, repairs, reconditioning or operation of goods covered by section 8(1) of the Act. Further, the Hon’ble High Court held that incidents mentioned in section 8 of the Act are those which under the law do not constitute value addition. Similarly, in the case reported in PTCL 2007 CL 565, it was held that assets (which also include furniture and fixture) were purchased by the companies as part of their normal taxable activity. Therefore, on the strength of the said judgment, the appellant submitted that insurance services are part of normal business activity and eligible for the input tax credit, the DCIR vide order-in-original No.08 of 2019 dated 01.08.2019 confirmed the input tax demand raised by the show cause notice along with default surcharge and imposed penalty under section 33(5) of the Act on the appellant. Being aggrieved, the Appellant preferred the appeal before the learned CIR (A) who while deciding the appeal confirmed the demand vide Order No.120/2019-20 dated 21.01.2020 on the following grounds:-

i.        Input tax on Service must have nexus with the process of manufacture and for determining the eligibility of service for the input tax credit, it must be shown that the service is used in or to be used in relation to the manufacture of taxable supplies. The insurance services do not meet this test.

ii.        The appellant’s activity of production of taxable goods, the same is an ongoing process wherein plant and machinery serves as instruments of production and the appellant’s fears and worries about its safety in future has nothing to do with the process of production and taxable goods and taxable supply thereof. Thus, input tax paid on insurance services is not admissible within the meaning of section 8(1)(a) and 8(1)(f) of the Act. 

Against the aforesaid impugned appellate order, the appellant preferred the appeal before this Tribunal and has assailed the impugned order on a number of grounds.

4.       This case came up for hearing on 31.03.2021. The learned AR for the appellant by relying upon the judgment of this Tribunal reported in PTCL 2012 CL 475 argued that the provisions of section 8(1)(a) of the Act, 1990 allows a deduction for all such input tax which relate to goods or services that contribute directly or indirectly and even remotely towards the furtherance of taxable activity. He pleaded that the expression “purpose” used in section 7(1) of the Act has a very wide application and according to the dictionary meaning the same refers to what something is supposed to be achieved. It is nowhere provided that deduction of input tax on such goods only, shall be allowed which are the direct constituent and integral part of taxable goods produced, manufactured, or supplied. In support thereof, the learned AR relied upon (2006) 94 Tax 222(H.C Kar) and PTCL 2018 CL 348(H.C). It has been stated that the payments in respect of which input tax was claimed exclusively represent the costs incurred by the company for the purpose of its business. He explained that the credit of input tax in respect of those taxable services is to be allowed which go to form part of the assessable value on which sales tax is charged and pleaded that the cost of insurance of plant and machinery is part of the assessable value of the goods on which sales tax has been paid. In support, he placed on record the copy of the decision of NEPRA in the matter of Tariff Adjustment where the insurance component is a part of the Tariff. Further AR relied upon the judgment reported in PTCL 2007 CL 565 wherein it was held that assets (which also include furniture and fixture) were purchased by the companies as part of their normal taxable activity. Therefore, on the strength of the said judgment, the appellant submitted that insurance services are part of normal business activity and eligible for the input tax credit. The provisions of section 7(1) read with section 8 of the Act do not restrict the input tax on services used in or in relation to the manufacture of taxable supplies whether directly or indirectly, but covers any service used in relation to the business of manufacturing of final taxable supplies, that insurance of plant and machinery is an integral part of the business of manufacturing of a taxable supply as no person would start manufacturing operations without insuring his plant and machinery against loss due to an accident, etc. or natural calamities, that insurance of plant and machinery was very much covered by the definition of input tax given in section 2(14) of the Act. The contention of the lower authorities that input tax on services must have nexus with the manufacture of final taxable supply and that insurance services have no nexus with the final taxable supply is absolutely incorrect and contrary to the law laid down by Hon’ble High Court in the case of Coca-Cola Beverages Pakistan Ltd Vs The Customs Excise and Sales Tax Appellate Tribunal and others, reported in PTCL 2018 CL 348, wherein the Court has specifically observed that in order to determine whether input tax is admissible in a particular case it has to be seen whether the goods were used in relation to the taxable supplies. It is not necessary that they should be an integral part thereof. Once a registered person establishes that the goods in respect of which he claims input tax adjustment was used for the purpose of taxable supplies as aforesaid, he would be entitled to the adjustment unless the Federal Government has issued a notification under section 8(1)(b) of the Act to disallow the same. At the end of the arguments, the learned AR apprised that a similar issue has been decided by this Tribunal against the registered person namely M/s Nishat Chunian Power Ltd bearing STA No.749/LB/2019 vide order dated 06.05.2020. He argued that in the said judgment, the Tribunal has not considered the judgments relied upon by the appellant in the instant case. He, therefore, pleaded that the impugned order is not sustainable.

5.       On the contrary, the learned DR, defended the impugned order by reiterating the findings of the Commissioner (Appeals) and emphasized that the services of insurance of Plant and Machinery has no nexus whatsoever with the manufacture of the taxable supply and hence, the same would not be eligible for a credit of input tax. He, therefore, pleaded that there is no infirmity in the impugned order.

6.       We have considered the submissions from both sides, perused the case-law cited by the learned AR and the available record. The only question involved in the instant case is the adjustment/credit of input tax paid on the premium for the services of insurance of Plant and Machinery. Undisputedly, the Appellant Company is engaged in the business of manufacturing and sale of electricity generated through a wind energy power plant, claimed input tax adjustments on services purchased/rendered with valid sales tax invoices, and used the same within the business premises for manufacturing of taxable supply, the veracity of which has not been questioned. Thus there has been created a legitimate right of input tax adjustment or refund under the provisions of section 7 read with section 8 of the Act for the appellant. However, the lower authorities denied input tax adjustment to the appellant in terms of section 8(1)(a) and 8(1)(f) of the Act without any reasoning or evidence that the alleged services were used for purposes other than for taxable supplies and held that the adjustment made by the appellant is in violation of section 8(1)(a) and 8(1)(f) ibid. Before any conclusion is drawn, it is imperative to reproduce hereunder the relevant provisions of the Act such as sections 7(1), 8(1)(a), and 8(1)(f) as the same are relevant for the sake of brevity.

“Section 7. Determination of tax liability.– (1) Subject to the provisions of sections 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:

    Section 8(1)(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;

    Section 8(1)(f). goods and services not related to the taxable supplies made by the registered     person”.         (Emphasis supplied)

          A reading of section 7(1) in juxtaposition to section 8(1)(a) read with section 8(1)(b) leads to the conclusion that a registered person shall be entitled to deduct input tax in the manner specified in section 7(1) ibid paid or payable on the goods or services used or to be used for any purpose for the manufacture or production of taxable goods or for taxable goods or for taxable supplies made or to be made by him. The findings of the lower authorities that input tax on services must have nexus with the manufacture of final taxable supply and that insurance services have no nexus with the final taxable supply is absolutely incorrect and contrary to the law laid down by Hon’ble High Court in the case of Coca-Cola Beverages Pakistan Ltd Vs The Customs Excise and Sales Tax Appellate Tribunal and others, reported in PTCL 2018 CL 348, wherein the Court has specifically observed that in order to determine whether input tax is admissible in a particular case it has to be seen whether the goods were used in relation to the taxable supplies. It is not necessary that they should be an integral part thereof. Once a registered person establishes that the goods in respect of which he claims input tax adjustment was used for the purpose of taxable supplies as aforesaid, he would be entitled to the adjustment unless the Federal Government has issued a notification under section 8(1)(b) of the Act to disallow the same. Therefore, it is established that both the authorities have failed to follow the law laid down by the Hon’ble High Court in the aforesaid judgment. Similarly, the word “related” used in section 8(1)(f) has also much importance/significance and has intentionally been used to have a wider meaning. The ordinary meanings of expression “related” are such as connected, linked, associated, or interrelated. Thus, the insurance services are connected with plant and machinery and as such the insurance of plant and machinery is an integral part of the business of manufacturing of a taxable supply as no person would start manufacturing operations without insuring his plant and machinery against loss due to any accident, etc. or natural calamities, that insurance of plant and machinery was very much covered by the definition of input tax given in section 2(14) of the Act.   

7.       Further the contention of the learned AR is also well-founded that while determining the tariff of electricity by the NEPRA, the insurance component is the part of Tariff. The relevant clause of the decision is reproduced hereunder:-

          “13.    Insurance during Operations

13.1.   The Authority had allowed Rs.0.6634/kWh as an insurance component to FWEL-I in the tariff determination. FWEL-I has requested to allow an insurance component of Rs.0.3810/kWh at the COD stage. As per information submitted by FWEL-I, verified insurance cost for the first year of post COD operations works out to Rs.47.555 million and the insurance component of tariff turns out to be Rs.0.3291/kWh. Consistent with the tariff determination, the authority has decided to allow the same to FWEL-I and has also decided that for future, insurance will be adjusted annually, on the basis of actual expenditure, not exceeding 1.35% of the approved EPC cost, upon production of authentic documentary evidence by FWEL-I.”

It clearly establishes that the credit of input tax in respect of insurance services is to be allowed which go to form part of the assessable value of taxable supply on which sales tax is charged and pleaded that the cost of insurance of plant and machinery is part of the assessable value of the taxable goods on which sales tax has been paid.

8.       A somewhat similar issue came before the Bombay High Court in the case of Ultra Tech Cement Ltd reported in 2010 (260) ELT 369 (para-37), wherein the Court has specifically rejected the Revenues contention that service to qualify as an input service must be used in or in relation to the manufacture of final product and has held that any service used in relation to the business of manufacturing of the final product would be an eligible input service. In the said judgment the Bombay High Court also considered the Apex Courts judgment in the case of Maruti Suzuki Ltd reported in 2009 (240) ELT 641 (SC) and observed that Revenues contention based on this judgment of the Apex Court that input service in order to qualify for the input tax credit must be only those services which have nexus with the manufacture of final products is not correct, as unlike the definition of input which is restricted to the input used directly or indirectly in or in relation to the manufacture of final products, the definition of input service not only means service used directly or indirectly in or in relation to the manufacture of the final products but also includes services used in relation to the business of manufacturing. In view of this judgment of the Bombay High Court, it was held that the Commissioners findings that any service for being covetable must be used in or in relation to the manufacture of the final product whether directly or indirectly is not correct and any service having nexus with the business of manufacture which has been used by a manufacturer would qualify as input service. Insurance of plant and machinery, goods in transit, cash in transit, and insurance of vehicles and laptops is an integral part of the manufacturing business, as no manufacturer would carry on manufacturing operations without insurance of plant & machinery, cash in transit, goods in transit, vehicles & computers, etc. against any loss due to accident, natural calamities, etc. In view of this, the services of plant and machinery, transit insurance of goods, insurance of cash in transit, laptop, etc. have to be treated as an activity related to the business and would be eligible for the input tax credit. The issue of admissibility of the input tax credit on the insurance of plant and machinery has also been considered and decided in favour of the taxpayer in the judgments of the larger Bench of the Tribunal titled as CCE Mumbai-iv Vs. GTC Industries Ltd reported in 2008(12) STR-468 (Tri.LB) and Tribunal judgments in cases of Finolex Cable Ltd. Vs CCE reported in 2009(14) STR-303 (Trib. Mum) and Multiplex India Ltd reported in 2009 (13) STR-616 (Tri.Bag)

Thus, the judicial consensus, as it stands today, are that in order to determine whether input tax is admissible in a particular case it has to be seen whether the goods or services were used in relation to the taxable supplies. It is not necessary that they should be an integral part thereof. Once a registered person establishes that the goods or services in respect of which he claims input tax adjustment was used for the purpose of taxable supplies as aforesaid, he would be entitled to the adjustment unless the Federal Government has issued a notification under section 8(1)(b) of the Act to disallow the same.

9.         In view of the above discussion, we hold that the impugned orders are not sustainable in law and therefore, both the orders passed by the lower authorities are annulled. Accordingly, the appeal of the appellant is allowed.

 

	-SD-   (M. M. AKRAM) JUDICIAL MEMBER
-SD-                   (IMTIAZ AHMED) ACCOUNTANT MEMBER