DYNO PAKISTAN LIMITED VS PAKISTAN
1991 P T D 1096
[Karachi High Court]
Before Saleem Akhtar and Muhammad Hussain Adil Khatri, JJ
DYNO PAKISTAN LIMITED
Versus
PAKISTAN through Secretary, Ministry of Finance, Islamabad and 3 others
Constitution Petition No. 905 of 1987, decided on 27/02/1990.
Sales Tax Act (III of 1951)---
----Ss. 3 & 7---Central Excise Rules, 1944, Rr. 10, 210 & 226---Sales tax-- Petitioner was a manufacturer of `urea-formaldehyde, imported (menthanol), a chemical which prior to becoming end-product (urea-formaldehyde), was exempt from sales tax but during process becomes `formaldehyde' which was a taxable product---Petitioner earlier, manufactured and sold in market few consignments of that intermediary product (formaldehyde), which fully established that (formaldehyde) was capable of being manufactured and marketed independently-- Petitioner, in circumstances, was rightly found liable to pay sales tax on use of formaldehyde in end-product.
Abbasi Textile Mills Ltd. v. Commissioner of Income-tax 1990 PTD 189;
Gul Ahmad Textile Mills v. Commissioner of Sales Tax (Central), Karachi 1985 PTD 211; Excide Pakistan Limited v. Central Board of Revenue and others 1989 PTD 1000; Noorani Cotton Corporation's case PLD 1965 SC 161; Shaiq Corporations Limited's case PLD 1986 SC 731 ref.
Anwar Mansoor for Petitioner.
Abdus Sattar for Respondents.
Dates of hearing: 17th and 18th February, 1990.
JUDGMENT
SALEEM AKHTAR, J.---The petitioner is engaged in manufacture of urea-formaldehyde. For manufacturing it the petitioner imports menthanol, a chemical, which after it is exidised becomes another chemical product namely formaline which when absorbed in water becomes formaldehyde. After further processing of formaldehyde with chemical additives and urea it result in urea -formaldeyhde, which is the end-product. Urea-formaldeyhde is exempt from sales tax under S.R.O. 666(1)/81, dated 25-6-1981. The petitioner commenced production on 20-5-1984 and made sale of two consignments of formaldehyde weighing 9.66 tons and paid sales tax on them. Except for these consignments the petitioner states that it has not sold it in market and has used if. for manufacturing the end-product namely urea-formaldehyde. The respondents 3 and 4 directed the petitioner to take out a license as manufacturer of formaldehyde which was a taxable good. The petitioner was accordingly registered as manufacturer of formaldehyde on which sales tax was payable at the rate of 12.50 per cent. Respondent No. 4 also required the petitioner to maintain the record of production as required by Central Excise Rules, 1944 which were accordingly maintained from 8-5-1985. Respondents have been realising sales tax thereon during the period from 20-5-1984 to 16-5-1985 amounting to Rs.36,000. The petitioner claims that formaldehyde is a partly manufactured good which is wholly incorporated in urea-formaldehyde which was subject to sales tax and, therefore, no sales tax is payable on it (formaldehyde). As the petitioner refused to pay sales tax notice dated 14-6-1985 was issued by respondent No.4 to show cause why sales tax amounting to Rs.12,47,000 on 23,47,293 Kg. of formaldehyde should not be recovered under Rule 10 of Central Excise Rules, 1944 and why penal action under Rules 210 'and 226 should not be taken. The petitioner submitted its reply on 22-9-1985 in which it reiterated that formaldehyde was not a manufactured good. The requisite condition precedent for taxability under section 3(1) of the Sales Tax Act was not reached. Formaldehyde was exempted under S.R.O. 7(1)/83, and if charge is to be made on in-process formaldehyde net rate would be Rs. 3 per Kg. instead of Rs.4.25 Kg. as it was a partly manufactured good. Respondent No.4 rejected the plea of the petitioner and by order dated 2-6-1986 ordered the petitioner to pay sales tax amounting to Rs.12,47,000 and imposed a penalty of Rs.2,000. The petitioner filed an appeal before respondent No. 1 which was dismissed. The revision application filed against this order was also rejected.
Mr. Anwar Mansoor the learned counsel for the petitioner has contended that considering the manufacturing process of urea-formaldehyde, formaldehyde is not manufactured but is assimilated in process and by various treatments given to this raw material the ultimate product is made which is urea -formaldehyde. It is further contended that the petitioner is not independently producing formaldehyde. From the facts stated by the petitioner it is clear that the raw-material for manufacturing formaldehyde is methanol which is imported by the petitioner. In the process of manufacturing urea-formaldehyde first formaldehyde is manufactured. Thereafter it is again processed for manufacturing urea-formaldehyde. Therefore, formaldehyde is the raw-material for manufacturing urea-formaldehyde. Refer Abbasi Textile Mills Ltd. v. Commissioner of Income-tax 1990 P T D 189. It is an admitted position that earlier few consignments of formaldehyde were manufactured and sold in the market by the petitioner. This establishes that formaldehyde is capable of being manufactured and marketed independently. In these circumstances it is to be considered whether the sales tax is payable on it. As the use of formaldehyde by the petitioner amounts to sale in terms of section 3(6)(d) of the Sales Tax Act and further as the end-product viz: urea-formaldehyde is exempt from sales tax, the petitioner is liable to pay sales tax on formaldehyde. Similar question came up for consideration in Gul Ahmed Textile Mills v. Commissioner of Sales Tax (Central), Karachi 1985 P T D 211, Excide Pakistan Limited v. Central Board of Revenue and others 1989 P T D 1000 and Electric Lamp Manufacturers of Pakistan v. Government of Pakistan and others. In the last judgment Ajmal Mian, CJ. (as he then was) has considered all the authorities and observed as follows:--
"Reverting to Mr. Muhammad Faridul Haq's submission that since the electric bulbs have been exempted under section 7 of the Act, no sales tax can be levied on the glass shells which are used for manufacturing electric bulbs, it will suffice to observe that since electric bulbs and glass shells can be marketed separately, in our view the exemption granted from the payment of sales tax on the electric bulbs would not exempt the glass shells from the payment of sales tax in terms of clause (iv) of subsection (4) and clause (d) of subsection (6) of section 3 of the Act."
It may be pointed out that in Abbasi Textile Mills Ltd. v. Commissioner of Sales Tax (Central), Karachi.1990 P T D 189, Noorani Cotton Corporation's case P L D 1965 SC 161, Shafiq Corporation Limited's case P L D 1986 SC 731 and Gul Ahmed Textile Mills' case 1985 P T D 211 were considered and explained. Finally it was observed as follows:
"We agree with the Tribunal and the High Court that it is yarn which is partly manufactured goods in respect of the cloth manufactured and exported and not raw cotton as contended. In the case of yarn, it is ginned cotton which is the partly manufactured goods, and as by the notification dated 1-5-1953 read with section 7 of the Act the exported cotton yarn was exempt from sales tax, the ginned cotton was leviable to sales tax until it was exempted from the levy of sales under section 7(1) of the Act by notification dated 22nd June, 1964. Similarly cotton fabrics and cotton yarn were exempted by notification, dated 11-6-1967 from the levy of sales tax. It is with respect to the meaning of the word `use' that the partly manufactured goods are leviable to sales tax as their keeping by the manufacturer amounts to sale. It cannot be denied that these goods are also manufactured goods and that in that view of the matter, the argument that from the stage of ginning of yarn to the stage of the weaving of cloth was an integrated process and cannot, therefore, be bifurcated or separated, loses its weight.
Civil Appeal No. 82-K of 1986 is also covered by the decision in Noorani Cotton Corporation's case. Here the partly manufactured goods are glass shells and glass tubes which are incorporated into or form a constituent or component part of articles, namely, electric bulbs and fluorescent tubes which are liable to the levy of sales tax and the end-products are themselves exempt from sales tax.
It is contended that the word `use' is co-related to independent use and not consumption and assimilation of the partly manufactured goods into a finished product. The answer to this submission will be found in the following observations in Noorani Cotton Corporation's case:
"This situation is met by the general provision in the last part of section 3(6) that the keeping of goods by the manufacturer for his own use would be regarded as a sale.
There is, therefore, no getting out from the levy of the sales tax merely because the goods were assilimilated into the end-product:"
The above observations fully apply to the present case. The intermediary goods being the raw-material is used for manufacturing the end-product which is exempt from sales tax, the petitioner is liable to pay sales tax on use of formaldehyde.
The petition is, therefore, dismissed.
H.B.T./D-85/K Petition dismissed.