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. |
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Appellant
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VS |
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Commissioner Inland Revenue, Corporate Zone, RTO,
Rawalpindi. |
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Respondent |
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Appellant by |
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Mr. Aazar Abdul Hameed, FCA |
Respondent by |
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Mr. Babar Chohan, DR |
Date of hearing |
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31.03.2021 |
Date of order |
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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.
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