APPELLATE
TRIBUNAL INLAND REVENUE, PESHAWAR,
(Single Bench)
STA No.76/PB/2018
(Tax
Period- July-2016)
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Commissioner I.R (Corporate Zone), RTO, Peshawar. |
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Appellant |
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Vs |
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M/s Gadoon Textile Mills Ltd., Gadoon Amazai,
Swabi. |
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Respondent |
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Appellant By: |
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Mr. Aziz
ur Rehman, DR |
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Respondent By |
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Mr. Usman
Gul, G.M |
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Date of Hearing: |
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10.10.2024 |
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Date of Order: |
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10.10.2024 |
O R D
E R
M.
M. AKRAM (MEMBER):
The titled appeal has been filed by the
appellant department against the impugned Order in Appeal No.177/2018, dated
15.02.2018, passed by the learned Commissioner Inland Revenue (Appeals),
Peshawar for the Tax Periods 07/2016 on the grounds as set forth in the memo of
appeals.
2. The brief facts giving rise
to the appeal are that the respondent, a company engaged in manufacturing
cotton yarn with an industrial unit in Gadoon Amazai, Swabi, regularly files
monthly sales tax returns. For the tax period of July 2016, the company submitted
a sales tax refund claim under Section 10 of the Sales Tax Act, 1990. However,
the STARR/CREST system raised objections based on Section 8(1)(h) & (i) of
the Act, read in conjunction with SRO 450(1)/2013 dated May 27, 2013.
The appellant department subsequently issued
a show cause notice (C.No: T050716100004/32 dated April 26, 2017), alleging
violations of Sections 4, 7, 8(1), 10, 26, and 73 of the Sales Tax Act, 1990,
as well as SRO 450(1)/2013. The notice also questioned why the refund should
not be rejected and why penal action should not be taken for these violations.
After providing the respondent the opportunity to be heard and considering
their explanations, the assessing officer issued Assessment Order No. 49/2017
dated August 7, 2017, confirming the violations and rejecting the sales tax
refund of Rs. 454,809. Dissatisfied with the decision, the company filed an appeal with the
Commissioner Inland Revenue (Appeals). In the order dated February 15, 2018,
the Commissioner vacated liabilities amounting to Rs. 348,725 under SRO
450(I)/2013. The appellant department, aggrieved by this decision, filed an
appeal before the tribunal, challenging the order on various grounds.
3. The case was
heard on 10.10.2024. Mr. Aziz ur Rehman, DR, represented the appellant
department in the appeal, while Mr. Usman Gul, General Manager of Gadoon
Textile Mills, appeared on behalf of the respondent/registered person. The learned DR strongly contended that a somewhat similar issue of input
tax had recently been settled by the Hon'ble Supreme Court of Pakistan in the
case titled M/s Rajby Industries, Karachi, etc. vs. Federation of
Pakistan and others (CP No. 4700, 310-K to 314-K, 423-K to 426-K,
553-K, and 493-K of 2021) through an order dated June 1, 2022, which was
decided in favor of the department. He further argued that the Peshawar High
Court, in its decision on STR No. 49-P/2023, did not take into account this Supreme
Court judgment. Additionally, concerning input tax under section 8(1)(h), the
learned DR referred to an unreported judgment of the Sindh High Court in the
case M/s Continental Biscuits, etc. vs. Federation of Pakistan &
others (CP No. D-1916/2016). Considering
the aforesaid judgments, the learned DR urged that the appeal filed by the
department should be accepted.
4. In
contrast, the learned AR for the respondent argued that the company had
purchased electric spare parts for textile machinery, wires, cables, office
equipment, steel pipes, etc, all of which were intended to be used in
furtherance of taxable activities. He further pointed out that this issue had
recently been settled by the Hon'ble Peshawar High Court in M/s Gadoon Textile Mills Ltd vs. Deputy
Commissioner IR, RTO, Peshawar, (STR No. 44-P/2023). In its
order dated September 20, 2023, the court observed that items like electric
wires, pipes, and cables, when used in machinery or for the maintenance of
machinery involved in production activities, should not be denied input tax
adjustment. He, therefore, contended that the appeal filed by the department be
dismissed.
5. I have heard
the parties and examined the record. The main issue in the instant case
pertains to the admissibility of input tax by the learned CIR(A) claimed on
account of the purchase of electric spare parts for textile machinery, wires,
cables, office equipment, steel, etc goods which are specifically prohibited
under section 8(1)(h) & (i) of the Sales Tax Act, 1990 read with
SRO.450(I)/2013 dated 27.05.2013. Since the primary activity of the respondent
is the manufacturing and sale of textile yarn, these items were considered not
to be directly used in the production of yarn. Before addressing this issue
further, it is important to examine the framework of the Act.
SCHEME OF THE
ACT
6. The Sales Tax Act, 1990, introduces an
indirect tax levied, charged, and collected on imported goods or taxable
supplies of goods. The supplier collects the tax on behalf of the government,
but the ultimate burden falls on the consumer of the imported or taxable goods.
Section 3 of the Act outlines the foundational principles of sales tax: first,
the tax amount is based on the value of goods imported into Pakistan or taxable
supplies made by a registered person; second, the tax becomes chargeable when goods
are imported or when a registered person makes taxable supplies as part of a
taxable activity; and third, the responsibility to pay the tax lies with the
importer of goods or the supplier of taxable goods within Pakistan. The Sales
Tax Act operates under a value-added tax (VAT) model, where sales tax is only
paid on the value added at each stage of production or distribution. This
system allows taxpayers to deduct the input tax they have paid on goods or
services used in manufacturing, producing, or marketing their taxable goods
from the output tax they owe on those goods. An essential feature of the VAT
model is the ability to credit input tax against output tax, with the final
output tax ultimately borne by the end consumer, as outlined in section 7(1) of
the Act. Under this provision, a registered person can deduct the input tax
paid or payable during a tax period from the output tax due on taxable supplies
for that period. According to section 2(14) of the Act, the tax paid at the
time of purchases is known as the "Input Tax" and is adjustable
against the "Output Tax" under section 2(20), which is charged on the
sale of finished products. Thus, the Act allows a manufacturer to claim the
input tax credit for sales tax paid or payable on purchases against the output
tax owed on the sales of its products, enabling the calculation of the final
tax liability under section 7.
ADJUSTMENT OF INPUT TAX
7. The
Sales Tax Act provides a mechanism for adjusting input tax against output tax
and allows for refunds if applicable. This mechanism is primarily governed by
Sections 7 (Determination of Tax Liability) and 8 (Tax Credit Not Allowed).
Section 7 (subject to Sections 8 and 8B) entitles a taxpayer to deduct input
tax paid or payable for the purposes of making taxable supplies from the output
tax owed for a specific tax period. While there are additional restrictions and
mechanisms within Section 7, they are not relevant to the current matter.
Importantly, the ability to adjust input tax or claim a refund is subject to
the conditions set forth in Section 8. Section 8 imposes restrictions,
specifying that a tax credit will not be allowed in certain circumstances. It
prohibits a registered person from reclaiming or deducting input tax unless it
is directly related to taxable supplies made or to be made. Additionally, the
section prevents the deduction of input tax on goods specified by the Federal
Government and other similar restrictions. The Hon'ble Supreme Court of
Pakistan, in the case M/s
Rajby Industries, Karachi, etc. vs. Federation of Pakistan and others
(CP No. 4700, 310-K to 314-K, 423-K to 426-K, 553-K, and 493-K of
2021), in its order dated June 1, 2022, made the following observations:
“10. It is worth mentioning that Section 8 triggers and stems from a
"non-obstante clause which accentuates that notwithstanding anything
contained in this Act, (STA 1990) a registered person shall not be entitled to
reclaim or deduct input tax paid on the goods or services which are more
particularly jotted down in clause (a) to (m). In the present case, clause (b)
is quite relevant which is reproduced as under:-
“(b) any
other goods for services) which the Federal Government may, by a notification
in the official Gazette, specify." [Emphasis supplied)
11. The aforementioned section spotlights the mandate conferred upon the
Federal Government to decide the entitlement or disentitlement with regard to reclamation
or deduction of input tax by a notification in the official Gazette. It is
clearly resonating that restrictions imposed for reclaiming input tax on
packing material by way of the impugned S.R.O. was not illegal, unlawful, or
without jurisdiction but it was within the realm and domain of powers vested in
the Federal Government under Section 8 of the Sale Tax Act, 1990.” (Emphasis
supplied)
8. In
this case, the subject goods were initially notified under section 8(1)(b)
through SRO 490(I)/2004 dated June 12, 2004, later amended by SRO 450(I)/2013
dated May 27, 2013, and are now part of the Act under sections 8(1)(h) and
8(1)(i). The respondent’s main argument is that the items in question are
directly used to facilitate and enhance the manufacturing of the final product,
making them an integral part of the taxable supply. Therefore, when section 7
and section 8 are read together, input tax adjustment should not have been
denied under the provisions of sections 8(1)(h) and (i). However, I disagree
with this contention, as the issue has already been settled by a learned
Division Bench of the Hon'ble Sindh High Court in AMZ Spinning and Weaving Mills (Pvt)
vs. Appellate Tribunal, Customs, Sales Tax and Federal Excise, Karachi
(2006 PTD 2821). The court held that due to the non-obstante clause in section
8, it overrides and takes precedence over section 7, and the denial of input
tax adjustment is based on section 8(1)(b). The purpose of enacting section
8(1)(b) was to deny input tax adjustment on certain items, even if they are
used in the production of taxable goods, as the Federal Government may choose
not to extend such benefits to taxpayers. The principle from this judgment also
applies to sections 8(1)(h) and (i), as previously, goods on which input tax
adjustment was denied were notified under section 8(1)(b). Now, in addition to
a notification (SRO 450) being issued, these goods have been specifically
incorporated into sections 8(1)(h) and (i) of the Act. I believe it is within
the Legislature's prerogative to permit or deny input tax adjustment. For
clarity, sections 8(1)(h) and (i) are reproduced below:
“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;
(b) any
other goods or services which the Federal Government may, by a notification in
the official Gazette, specify;
…………………….
(h) goods
used in, or permanently attached to, immoveable property, such as building and
construction materials, paints, electrical and sanitary fittings,
pipes, wires, and cables, but excluding pre-fabricated buildings
and such goods acquired for sale or re-sale or for direct use in the
production or manufacture of taxable goods;
(i) vehicles falling in Chapter 87 of the First
Schedule to the Customs Act, 1969 (IV of 1969), parts of such vehicles,
electrical and gas appliances, furniture, furnishing, office equipment
(excluding electronic case registers), but excluding such goods acquired
for sale or re-sale;”[Underlined to supply emphasis]
It can be seen that the sentence used in section
8(1)(h) i.e. “Goods for direct use in the production or manufacture of
taxable goods” refers to items that are used directly in the process of
production or manufacturing a taxable product. These goods may be used as raw
materials, components, or supplies in the production of process, and are
typically subject to taxes when they are sold or used in the production of
taxable goods. For example, if a company manufactures shoes, the leather,
thread, and other materials used to make the shoes would be considered “goods
for direct use in the production or manufacture of taxable goods.” These goods
would be subject to tax when they are sold or used in the production process.
On the other hand, items that are not directly used in the production or
manufacture of taxable goods, such as office supplies, or equipment, would not
be considered “goods for direct use in the production or manufacture of taxable
goods.” The
expression “Direct use” generally refers to the use of an item in a manner that
is immediately necessary or essential for a particular purpose. In the context
of goods used in the production or manufacture of taxable goods, “direct use”
typically refers to the use of an item as a raw material, component, or supply
in the production process, as opposed to its use in a general or administrative
sense.
9. The intent and
purpose of 8(1)(h) & (i) of the Act and so also SRO.450(I)/2013 reflects
that the Legislature has decided that these materials, which have been so
notified, are not a direct constituent of a taxable supply, whereas, even
otherwise it is settled in the case of AMZ Spinning cited supra that Input Tax
Adjustment can even be denied on materials, which are a direct constituent of a
taxable supply. Similarly,
to begin with, the scope of section 8, we want to clarify that unlike section
7, which is a beneficial provision for conferring a right to deduct input tax,
section 8 carries certain restrictions and contains the bar on the said right
of adjustment. Among others, section 8 is a safeguard to prevent misuse of the
right of input tax adjustment, especially with respect to goods not directly or
integrally part of the taxable supply. Reference can be made to the case of Collector
of Customs v.Sanghar Sugar Mills, PLD 2007 SC 517, where the Hon’ble Supreme Court held as follows:-
“Section
7 of the Sales Tax Act, which is a beneficial section, entitles a registered
person to deduct input tax, from output tax, however, section 8 provides
certain eventualities and the powers of the Federal Government through a
notification in the official Gazette specify the goods under which the input
tax is not available and in this respect the Federal Government while
exercising powers under the aforesaid section has issued notification
prescribing the goods on which the adjustment of input tax was disallowed. This
may be in order to forestall the possible misuse of the input adjustment
against the procurement of such goods which are not direct
constituents/ingredients of the finished goods or which have multiple usages as
well and also in line with the provisions of section 8 that the goods were used
not for the purpose of manufacture or production of taxable goods or taxable
supplies. The refusal of input tax adjustment within the purview of the
legal provision or legally competent notifications do not absolve the assets
from the settled/due liability.”[Underlined to supply emphasis]
10. The unreported
judgment of the Sindh High Court in the case M/s Continental Biscuits,
etc. vs. Federation of Pakistan & others,(CP No. D-1916/2016),
where the court, in its order dated November 24, 2020, observed that;
“ We, respectfully do not agree with this part
of the judgment of the Appellate Court in as much as the Appellate Court had
already arrived at a contrary conclusion after relying upon the judgment of the
Hon’ble Supreme Court in the case of Attock Cement (1999 PTD 1892.
“9……….However, as already discussed above, such deduction is not admissible
under section 8 if the Federal Government under a notification includes the
accessories and spare parts in the goods within the meaning of section 8(1)(b)
of the Act.” ) and therefore, in such circumstances in our considered view
adjudicating authority cannot take a contrary view once the Supreme Court and
the High Court have already arrived at a conclusion that any input tax
adjustment under section 7 of the Act is subject to section 8 ibid. Therefore,
the opinion of the learned Single Judge of the Lahore High Court in Nishat
Mills (2020 PTD 101) is correct and applicable to the present facts before us.”
As
reproduced above, there is an express bar on input adjustment with respect to
wires, cables, bars, furniture, equipment, etc in clauses (h) and (i). The
exception is where such goods are directly used in the manufacturing process or
goods acquired for sale or re-sale respectively. It is a well-settled canon of
statutory interpretation that redundancy cannot be attributed to the words of
the statute to render them superfluous or nugatory. Each and every word of the
statute has to be given effect. See Searle IV Solution v. Federation of
Pakistan, 2018 SCMR 1444; Pakistan Television Corporation v. CIR,
Islamabad, 2017 SCMR 1136; OGDCL v. FBR, 2016 PTD 1675 [Islamabad]. The term direct use has been employed by the
legislature in its wisdom to formulate a fiscal policy, which cannot be
rendered meaningless by this forum. Being fortified with the view of the
Hon’ble Supreme Court of Pakistan in the Sanghar Sugar Mills case (supra),
binding in terms of Article 189 of the Constitution of Pakistan, 1973 I am
unable to agree with the learned AR for the respondent. Therefore, the impugned
order of the learned CIR(A) is modified to such an extent by declaring that the
input tax claimed by the respondent and comes under the ambit of section
8(1)(h) & (i) is not admissible.
11. In light of the above, the
department appeal is accepted.
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-SD- (M.
M. AKRAM) JUDICIAL
MEMBER |
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