PAKISTAN OXYGEN LIMITED VS PAKISTAN
1991 P T D 472
[Karachi High Court]
Before Saleem Akhtar and Muhammad Aslam Arain, JJ
PAKISTAN OXYGEN LIMITED
versus
PAKISTAN through the Secretary, Ministry of Finance, Islamabad and 3 others
Constitutional Petition No.D-100 of 1987, decided on 31/01/1991.
(a) Sales Tax Act (III of 1951)---
----S. 3(6)(c)---Sale---Provision of S.3(6) introduces the concept of notional sale or sale by fiction of law---All arrangements mentioned in S. 3(6)(a)(b)(c) and (d), are to be treated as sale---Where a customer supplies raw material to a manufacturer who under a contract employs his labour and machinery and from such raw material manufactures the goods, such arrangement or any other arrangement in manufacturing such goods shall, for the purpose of sales tax, be treated as sale---Value of such sale shall be determined by the Sales Tax Officer under the Sales Tax Act, 1951---Where any manufacturer obtains raw material from the customers and by treatment or any process manufactures goods out of it, although the element of sale is not there, such arrangement shall be treated as sale for the purpose of Sales Tax Act.
M/s. Noorani Cotton Corporation v. Sales Tax Officer `A' Ward, Lyallpur PLD 1965 SC 161; Gul Ahmad Textile Mills Limited, Karachi v. Commissioner of Sales Tax (Central), Karachi 1985 PTD 211; Commissioner of Sales Tax v. Shafiq Corporation (Pvt.) Limited PLD 1986 SC 731 and Abbasi Textile Mills Ltd. v. Commissioner of Income-tax 1990 PTD 189 ref.
(b) Sales Tax Act (III of 1951)---
----S. 3(1)(a) & (4), proviso---Central Excises and Salt Act (I of 1944), S.3---Sales tax is payable by the manufacturer and producer on value of all goods manufactured or produced by it in terms of S. 3(4)---Sales tax is payable when the goods are delivered to the purchaser or when the property in the goods passes to the purchaser---Where the Central Board of Revenue so directs the sales tax under S. 3(1)(a) can be levied and collected as if it were a duty of excise leviable under S. 3 of the Central Excises and Salt Act, 1944 and all other provisions of the said Act and the Rules made thereunder shall apply notwithstanding the Sales Tax Act---If the Central Board of Revenue so directs the sales tax becomes payable and can be recovered according to the provisions of Central Excises and Salt Act, 1944 relating to the recovery of excise duty---Manner and methods in such a situation thus will be completely different from the scheme provided by S. 3(I)(a) & (4) of the Sales Tax Act. 1.951.
(c) Sales Tax Act (III of 1951)---
----S. 3(6)---Constitution of Pakistan (1973), Art. 199---Plea that S. 3(6) of the Sales Tax Act, 1951 was ultra vires of the Constitution having not been raised in the Constitutional petition, could not be allowed to be raised without specifically pleading in the petition.
State of Madras v. Messrs Gannon Dunkerley & Co. (Madras) Ltd. AIR 1958 SC 560 ref.
(d) Sales Tax Act (III of 1951)---
----S. 3(6)---Constitution of Pakistan (1973), Art. 199---Sale by fiction of law as contemplated by S. 3(6)---High Court declined to express opinion on this aspect, plea having not been raised in the Constitutional petition.
Electric Limp Manufacturers of Pakistan Limited v. The Government of Pakistan and others 1989 PTD 42; State of Madras v. Messrs Gannon Dunker1e) & Co. (Madras) Ltd. AIR 1958 SC 560; Messrs K.L. Johar .C Co. v, The Deputy Commercial Tax Officer, Coimbatore III, AIR 1965 SC 1082; Messrs Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry, AIR 1968 SC 784 and Messrs Vishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officer and others AIR 1978 SC 449 ret:
(e) Sales Tax Act (III of 1951)---
----S. 3(6)(c)--Assessee, a manufacturer of industrial gases---Contractors had supplied calcium carbide to the assessee who employing the labour, machinery and technical process manufactured dissolved acetylene gas from the said raw material---Such arrangement and exercise, held, was covered by S. 3(6)(c) which would amount' to a sale---Manner of determination of value of goods---Charges for labour and processing shall be deemed to be the value of the goods for the purpose of charging sales tax.
Contractors had supplied calcium carbide to the assessee who employing the labour, machinery and technical process manufactured dissolved acetylene gas from the said raw material. This arrangement and exercise was covered by section 3(6)(c) which will amount to a sale. Therefore, in such circumstances it was to be seen iii what manner the value of the goods was to be determined for purposes of calculating 4he sales tax. Section 3(6)(c) provides the formula for determining the value in such circumstances. If the entire arrangement the value of the goods had not entered into transaction and the assessee had only contracted for labour and processing the raw material supplied by the contractors. Thus the charges for labour and processing shall be deemed to be the value of the goods for the purpose of charging sales tax:
Mansoor Ahmed Khan and Anwar Mansoor for Petitioner.
Zahiruddin Khan for Respondents.
Date of hearing: 10th January, 1991.
JUDGMENT
SALEEM AKHTAR, J.---The petitioner is manufacturer of industrial gases amongst other, acetylene gas which is used for welding purposes. This gas is produced by treating calcium carbide, the only raw material used for its production. Indus River Contractors required acetylene gas in large quantities and for this purpose they imported calcium carbide which they supplied to the petitioner during May, 1981 to April, 1984 for manufacturing dissolved acetylene gas. The petitioner produced this product and charged only processing charges. The Sales Tax was recovered on these processing charges at the prevailing rate of Sales Tax. Respondent No.1 issued a show cause notice dated 14-10-1984 to the petitioner alleging that it was discovered that for supply of dissolved acetylene gas to Indus River Contractors the petitioner has charged at a lower rate of Rs.56.52 instead of Rs.70.51 charged from other customers. As the price cannot be different for the same article and the same quantity for the purpose of assessment of Sales Tax the petitioner was called upon to show cause why it should not pay Rs.1,89,693 as Sales Tax and penal action may not be taken' against it.
The petitioner submitted its reply and denied the allegations stating that the raw material was supplied to it by Indus River Contractors and accordingly it had charged for processing the goods. Respondent No.1 rejected the plea and it was held that the Sales Tax was payable on the total, value even in cases where the raw material has been supplied by the customer. However, no penal action was ordered to be taken. The petitioner fled appeal before respondent No.3 who holding that action was proper remanded the case for re-determination of tax liability taking period-wise wholesale cash price and element of fluctuation in price. Petitioner then filed a revision before respondent No.1 which was dismissed with the observation that the petitioner was liable to pay Sales Tax under section 3(4) of the Sales Tax Act, 1951.
Mr. Anwar Mansoor the learned counsel for the petitioner has contended that as the petitioner had not sold gas to Indus River Contractors Sales Tax was not chargeable. The learned counsel has referred to section 3(1)(a) and (4) of the Sales Tax Act and contended that sales tax can be charged only on goods which are subject to transaction of sale. Section 3(1)(a) provides that on value of all goods manufactured or produced the Sales Tax. shall be payable by the manufacturer and producer and in terms of section 3(4) according to which the tax is payable when the goods are delivered to the purchaser or when the property in the goods passes to the purchaser. However there is a proviso tosubsection 4 of section 3 according to which where the Central Board of Revenue so directs the Sales Tax under clause (a) of subsection (1) of section 3 shall be levied and collected as if it were a duty of excise leviable under section 3 of the Central Excises and' Salt Act, 1944 and all other provisions of the said Act and the rules made thereunder shall so far as may be and with the necessary modifications, apply notwithstanding this Act. Therefore, if the Central Board of Revenue so directs the Sales Tax becomes payable . and can be recovered according to the provisions of Central Excises & Salt Act relating to recovery of excise duty. In such a situation the manner, method and time of recovery will thus be completely different from the scheme provided by section 3(1)(a) and (4).
Relying on Section 3(1)(a) and section 3(4) the learned counsel contended that the goods were never sold to the Indus River Contractors and therefore no tax could be charged. The argument does not seem to be correct because Section 3 of subsection (6) introduces the concept of notional sale or sale by fiction of law which reads as follows:--
"S.3(6). Determination of value for tax in certain circumstances.-- Where goods are produced or manufactured in Pakistan under such circumstances or conditions as render it difficult to determine the value thereof for the tax because-- '
(a) a lease of such goods or the right of using the same but not the right of property therein is sold or given, or
(b) such goods having a royalty imposed thereon, the royalty is uncertain, or is not from other causes a reliable means of estimating the value of the goods; or
(c) such goods are manufactured by contract for labour only and not including the value of the goods that enter into the same or under any other unusual or peculiar manner or conditions; or
(d) such goods are for use by the manufacturer or producer.
the Sales Tax Officer may determine the value for the tax under this Act and all such transactions shall, for the purposes of this Act, be regarded as sales."
A perusal of this provision will show that in terms of clause `c' where a customer supplies raw material to a manufacturers who under a contract employs his labour and machinery and from such raw material, manufactures the goods, such arrangement or any other arrangement in manufacturing such goods shall for the purpose of Sales Tax be treated as sale. The value of such sale shall be determined by the Sales Tax Officer under this Act. Therefore, where any manufacturer obtains raw material from the customers and by treatment or any process manufactures goods out of it although the element of sale is not there such arrangement shall be treated as sale for the purpose of Sales Tax Act.
The question whether arrangement as introduced by section 3 subsection (6)(d) amounts to sale was considered in M/s. Noorani Cotton Corporation v. Sales Tax Officer `A' Ward Lyallpur P L D 1965 SC 161 where it was observed as follows:--
"To take up the first contention raised before the High Court namely that subsection (6) of section 3 could not be the basis of the imposition of sales tax in a case where the article was kept for use by the manufacturer, it will be observed that according to subsection (6)(d) the Sales Tax Officer may determine the value for the tax in a case where the goods are kept for use by the manufacturer and such a transaction is to be regarded as a sale. The contention put forward on behalf of the appellants was that in the definition of `sale' there was no extension of its meaning so as to include a case where the manufacturer keeps the goods for himself, that subsection (6) related only to assessment of value for the purpose of charge of tax, and that as long as the definition of `sale' did not include such a transaction there would be no liability to pay sales tax. While it has to be accepted that the correct way of bringing a transaction within the definition of `sale' was to make a provision in the definition, there can be no doubt at all as to the intention of the Legislature in subsection (6). It has clearly been provided that all such transactions are to be regarded as sales for the purpose of this Act. At the same time if we do not regard this transaction as a sale subsection (6)(d) becomes wholly redundant for then no need will ever arise of assessing the value in a case where manufactured goods are kept by the manufacturer. The need for such assessment arises only if tax is payable on goods which are kept by the manufacturer for his own use. There is one point which needs explanation here. According to section 3(4) tax on manufactured goods is to be paid when goods are delivered to the purchaser or property in the goods passes to the purchaser. It does not say that tax is payable when there is a sale. Section 3(6) on the other hand does not use the word `purchaser' anywhere. It does not say that the keeping of goods for use by a manufacturer will amount to a delivery of goods to the purchaser or to the passing of property to the purchaser. However, it used the word `sale' and according to the definition of sale in the Sales Tax Act a sale occurs when property passes from one person to another. If the effect of subsection (6)(d) be that keeping of goods by the manufacturer becomes a sale then property does pass to the purchaser. Even otherwise as we have stated the fact that value is to be computed in such a case necessarily involves that the keeping of goods by the manufacturer has become liable to the payment of sales tax."
This was followed in Gul Ahmad Textile Mills Limited, Karachi v. Commissioner of Sales Tax (Central), Karachi 1985 P T D 211. Noorani Cotton Corporation case was considered by the Supreme Court in the Commissioner of Sales Tax v. Shafiq Corporation (Pvt.) Limited P L D 1986 SC 731 and the interpretation placed on section 3(6)(d) treating such arrangement as sale was confirmed. Again in Abbasi Textile Mills Ltd. v. Commissioner of Income Tax 1990 P T D 189 this view was followed and keeping of goods used by manufacturer for his own use was regarded as sale as specified by section 3(6) of the Sales Tax Act. On the strength of these authorities it can safely be observed that all arrangements mentioned in section 3(6)(a)(b)(c) and (d) are to be treated as sale.
Mr. Anwar Mansoor the learned counsel relying on the State of Madras M/s. Gannon Dunkerley & Co (Madras) Ltd. AIR 1958 SC 560 contended that such sale as provided by section 3(6) is ultra vires of the Constitution. Such plea has not been raised by the petitioner in his petition and therefore challenge to the vires of any provision of law cannot be allowed to be raised without specifically pleading the same.
Similar contention as raised by the learned counsel for the petitioner about the sale by fiction of law as contemplated by section 3(6) was considered in Electric Lamp Manufacturers of Pakistan Limited v. The Government of Pakistan and others 1989 P T D 42 where several judgments of the Supreme Court of India namely The State of Madras v. M/s. Gannon Dunkerley & Co (Madras) Ltd. A I R 1958 SC 560, M/s. K.L. Johar & Co. v. The Deputy Commercial Tax Officer, Coimbatore III, A I R 1965 SC 1082, M/s. Sri Tirumala Venkateswara Timber and Bamboo Firm v. Commercial Tax Officer, Rajahmundry, A I R 1968 SC 784 and M/s. Vishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officer and others, A I R 1978 SC 449 were considered. In the last referred judgment of the Supreme Court of India the view expressed in A I R 1958 SC 560 relied upon by the learned counsel for the petitioner it was observed that this view is `capable for further scrutiny.' Therefore, even in India there seems to be a difference of opinion on this question. It' may further be noted that in Electric Lamps case Ajmal Mian, C.J. (as he then was) has distinguished the judgment cited by the learned counsel for the petitioner. In any event we do not wish to express our opinion on this aspect of the case as the same has not been raised in the petition or fully argued by the parties.
It seems undisputed that Indus Gas Contractors had supplied calcium carbide to the petitioner who employing the labour, machinery and technical process manufactured dissolved acetylene gas from the said raw material. This arrangement and exercise is covered by section 3(6)(c) which will amount to a sale. Therefore in such circumstances it is to be seen in what manner the value of the goods is to be determined for purposes of calculating the sales tax. Section 3(6)(c) provides the formula for determining the value in such circumstances. In the entire arrangement the value of the goods has not entered into transaction and the petitioner had only contracted for labour and processing the raw material supplied by the Indus River Contractors. Thus the charges for labour and processing shall be deemed to be the value of the goods for the purpose of charging sales tax. According to the petitioner for the charges received by the petitioner sales tax has been paid. This has not been denied. In these circumstances respondent No.4 could not have issued notice and taken subsequent action to impose sales tax on the basis of sale price of the dissolved acetylene gas. We therefore declare that the impugned notice and orders passed by the respondents are without lawful authority and of no legal effect.
M.B.A./P-187/K Order accordingly.