1991 P T D 778
[Lahore High Court]
Before Irshad Hasan Khan, J
CHAMPION CLOCK COMPANY
Versus
CENTRAL BOARD OF REVENUE and others
Writ Petition No.28 of 1987, heard on 04/05/1991.
(a) Sales Tax Act (III of 1951)--
----S.3(4)(iv)---Constitution of Pakistan (1973), Art.199---Sales tax, chargeability of---Petitioner's company manufactured wall clocks as well as plastic bodies/cases thereof---Cases/bodies of wall clocks were assembled into a wall clock---No separate sale of bodies/cases at any stage---Wall clocks manufactured in Pakistan exempted from sales tax ---Cases/bodies of clocks which are used in, making the wall clocks, held, could not be regarded as having a separate identity for the purpose of payment of sales tax in view of the total exemption on the wall clock---Exemption granted for payment of sales tax on wall clock would also exempt the bodies from the payment of sales tax.
Commissioner of Sales Tax v. Messrs Shaiq Corporation Ltd. PLD 1986 SC 731 fol.
Commissioner of Income-tax v. Messrs Shaiq Corporation Ltd. PLD 1986 SC 731; Messrs Electric Lamp Manufacturers of Pakistan Ltd. v. Government of Pakistan 1989 PTD 42; Sh. Fazal Elahi v. Federation of Pakistan 1988 SCMR 2103; Messrs Universal Brushes Ltd. v. Superintendent, Central Excise and Land Customs PLD 1985 Kar. 132; Messrs Esskay Limited v. Federation of Pakistan 1984 PTD 142; Messrs Noorani Cotton Corporation v. The Sales Tax Officer PLD 1965 SC 161; Latif Bawany Jute Mills Ltd. v. Sale Tax Officer 1971 PTD 26 and Commissioner of, Sales Tax v. H. Muhammad Hussain & Company 1974 PTD 20 rel.
(b) Sales Tax Act (111 of 1951)--
----S.3(6)---Section 3(6) relates to the determination of value for tax in circumstances or conditions as render it difficult to determine the value of goods for the tax because such goods are for use of manufacturer or producer and in such circumstances the Sales Tax Officer is to determine the value of the tax under the Act and all such transactions for the use of such goods by the manufacturers or producers by fiction of law have been made a sale.
Rafiq Ahmed Bajwa for Petitioner.
Faqir Muhammad Khokhar, Dy. A.-G. and Ch. Muhammad Ishaq for Respondents.
Date of hearing: 4th May, 1991.
JUDGMENT
This petition under Article 199 of the Constitution of the Islamic Republic of Pakistan calls m question Letter No. C. No. 16(2)(ST)/80, dated 17-12-1986 whereby the Central Board of Revenue held that sales tax is leviable on the bodies/cases of wall clocks manufactured in the factory of the petitioner and the show-cause notice, dated 19-1-1987 issued by the Deputy Superintendent, Sales Tax, Circle II, Faisalabad, whereby the petitioner was directed to pay sales tax in the light of the said ruling of the Central Board of Revenue, for the said goods manufactured in the factory since 1-10-1984.
2. The facts relevant for disposal of the writ petition may be briefly stated. The petitioner company is manufacturing wall clocks, known as Champion Clocks which are assembled from the components such as movements, screws, hard board etc. and for its assembling the petitioner company prepares cases/bodies wherein the components as imported are fitted and thereafter wall clocks are cleared from the factory for sale. The cases/bodies of the clocks are integral part of the wall clocks.
The wall clocks manufactured/produced in Pakistan were declared exempted from the chargeability of the sales tax vide Notification No.S.R.O.666(I)/81, dated 25-6-1981 as amended by S.R.O. No.563(1)/82, dated 14-6-1982.
It is an admitted fact that the bodies/cases of wall clocks manufactured by the petitioner is excisable item mentioned at Serial No.05.01 of the First Schedule of the Central Excises and Salt Act, 1944 and subjected to sales tax under the Pakistan Custom Tariff Item No.91.10. The goods are subjected to levy of sales tax under section 3(4)(iv) of the Sales Tax Act, 1951 (hereinafter called the Act). The petitioner company represented to the Central Board of Revenue vide their letter of 1st September, 1986, seeking clarification, whether sales tax is leviable on plastic bodies/cases which are manufactured by them or not. The Central Board of Revenue through the impugned letter informed that bodies/cases falling under the Pakistan Custom Tariff, item No.91.10, manufactured by the petitioner company, are subject to levy of sales tax under section 3(4)(iv) of the Act. Consequently, a show-cause, notice, dated 19-1-1987 was issued to the petitioner company by the Deputy Superintendent, Sales Tax, Circle II, Faisalabad, calling upon them to pay the sales tax on the said cases/bodies manufactured in the factory since 1-10-1984, which has been impugned in this Constitutional petition,
3. Mr. Rafique Ahmad Bajwa, learned counsel for the petitioner has argued that no sales tax was payable on the wall clocks and, therefore, the plastic bodies/cases of wall clocks used in the final manufacture of the wall clocks are also exempt from the sales tax in view of the dictum laid down by the Supreme Court in the case of Commissioner of Income Tax v. Messrs Shaiq Corporation Ltd. PLD 1986 SC 731.
4. Mr. Faqir Muhammad Khokhar, learned Deputy Attorney-General and Ch. Muhammad Ishaq, learned counsel for the respondents have placed reliance on Messrs Electric Lamp Manufacturers of Pakistan Ltd. v. Government of Pakistan (1989 P T D 42), Sh. Fazal Elahi v. Federation of Pakistan (1988 S C M R 2103), Messrs Universal Brushes Ltd. v. Superintendent, Central Excise and Land Customs (P L D 1985 Kar. 132), Messrs Esskay Limited v. Federation of Pakistan (1984 P T D 142) and Messrs Noorani Cotton Corporation v. The Sales Tax Officer (P L D 1965 SC 161) to contend that plastic bodies/cases are independent marketable goods and when used for manufacturing wall clocks, lose their identity and its end-product is called wall clock and not plastic bodies which fell under Pakistan Custom Tariff No.91.10, manufactured by the petitioner company, and therefore, subjected to levy of sales tax under section 3(4)(iv) of the Act.
5. I have heard the learned counsel for the parties and perused the material available on the record.
6. The first judgment on the subject-matter was delivered in the matter of Messrs Noorani Cotton Corporation (supra) and the same has been followed by the Sindh High Court in Messrs Electric Lamp Manufacturers of Pakistan Ltd. (supra) and Messrs Universal Brushes Ltd. (supra). The ratio of the case Messrs Noorani Cotton Corporation (supra) is that if the end-product is not liable to payment of sales tax, then unless a provision is made that a person would not pay tax on the production of the first article, that is, to partly manufactured goods to be assimilated in the end-product, will be liable to payment of tax in accordance with the general provision in the last para., that is, clause (d) of section 3(6) of the Act. This case was duly considered by a Bench of the Supreme Court, consisting of four learned Judges, headed by Hon'ble Chief Justice of Pakistan in the case of Commissioner of Sales Tax v. Messrs Shaiq Corporation Ltd. (P L D 1986 SC 731). After elaborate discussion of the cases cited at the Bar, it was held that no sales tax was payable on the imported material which lost its identity after being incorporated into the end-product. As to the ratio laid down in Messrs Noorani Cotton Corporation's case, it was observed that there was no inconsistency, in that, the precedent case was decided by the High Court on the assumption of both the parties that cotton seed oil was exempted from payment of tax but that was not so as it was not exempted under section 7 of the Act, therefore, the manufacture or produce of cotton seed itself which was used for manufacturing cotton seed oil would not be liable to payment of sale s tax for cutting of cotton seed by the manufacturer for extracting cotton seed oil was a sale under section 3(6)(d). It was not a sale of partly manufactured goods, therefore, not subject to payment of tax. It would thus be seen that the case of Messrs Noorani Cotton Corporation (supra) is distinguishable as also pointed out in the case of Latif Bawany Jute Mills Ltd. v. Sales Tax Officer (1971 P T D 26) and Commissioner of Sales Tax v. H. Muhammad Hussain & Company (1974 P T D 20). After elaborate discussion, the Supreme Court held in the case of Commissioner of Sales Tax (supra) as under:--
"The assessee was a licensed manufacturer of electric fans and was exempted from the payment of tax on partly manufactured goods imported for being incorporated into the end-product under section 4(b) of the Act. The partly manufactured goods in the normal course were leviable to charge under section 3(l)(b) and the stage at which the sale tax was payable was after import but before clearance by the Customs authorities under section 5(1)(b) of the Act. That stage had passed away. The partly manufactured goods had been assimilated in the production of fans, and the critical date on which these were sought to be assessed for payment of tax was the closing date that is 14th June, 1965. On that date they had lost their original shape and could not be subjected to any event as prescribed under section 4(1)(a) and (b) of the Act. That being so they were not liable to payment of the tax. In this context the High Court rightly decided the case on the basis of two judgments cited above while distinguishing Noorani Cotton Corporation's case.
Lastly, on the critical date a notification was issued under section 7 of the Act granting exemption to the fans produced or manufactured by the assessee without any condition. Therefore, as there was a wholesale exemption, the raw material which had been incorporated could not be regarded as having a separate identity for the purpose of payment of tax. In this connection reference may be made to the judgment of this Court' in the case of Commissioner of Income-tax, East Pakistan."
7. In Fazal Elahi's case (supra), the judgment delivered by the Supreme Court in the case of Commissioner of Income-tax v. Messrs Shaiq Corporation Ltd (P L D 1986 SC 731), was not considered. Likewise, the judgment rendered in Messrs Esskay Limited (supra), by the learned Single Judge of this Court. No reference was made to the aforesaid judgment of the Supreme Court.
7-A. In the instant case, the wall clocks as well as bodies/cases thereof are manufactured by the petitioner company. The petitioner manufactures the bodies of the wall clocks and then incorporates them into a wall clock. There is no sale of the first manufactured bodies because the petitioner only uses them for the manufacture of the wall clocks and, therefore, no sales tax can be levied on the bodies which are used for the manufactures of wall clocks, inasmuch as, the notification referred above grants exemption to wall clocks manufactured in Pakistan without any condition. Therefore, in view of the wholesale exemption on the wall clocks, the raw material, that is, body of the clock which is incorporated into the wail clock could not be regarded as having a separate identity for the purpose of payment of tax as held in the case of the Commissioner of Sales Tax (supra) and in the case of Commissioner of Income-tax, East Pakistan v. Messrs Ayurvedic Pharmacy (Dacca) (P L D 1970 SC 93). Respectfully following the ratio laid down in the aforementioned cases of the Supreme Court, I hold that the exemption granted from payment of sales tax on wall clock would also exempt the I bodies from the payment of sales tax in terms of clause (iv) of subsection (4) of 1 section 3 of the Act.
It may also be observed that subsection (6) of section 3 of the Act is not attracted to the facts and circumstances of the present case, in that, it relates to 'determination of value for tax in circumstances or conditions as render it difficult to determine the value thereof for the tax because such goods are for the use of manufacturer or producer and in such circumstances the Sales Tax Officer is to determine the value of the tax under the Act and all such transactions for the use of such goods by the manufacturer or producer by fiction of law have been made a sale. Here the body of the clock though a separate item on which sales tax is leviable but when used by incorporating into wall clock, loses its separate entity for the purpose of payment of tax as stated in the last two precedent cases of the Supreme Court and, therefore, clause (d) of subsection (6) of section 3 of the Act cannot be pressed into service.
In view of the above, the writ petition is accepted and the Central Board of Revenue is restrained from levying the sales tax on wall clocks bodies/cases manufactured by the petitioner in Pakistan for the purposes of manufacturing the wall clocks, in terms of Notification No.S.R.O. 666(1)/81, dated 25-6-1981 as amended by S.R.No. 563(1)/82, dated 14-6-1982, as long as the said Notification remains operative. The parties shall, however, bear their own costs.
Z.S./C-72/LWrit petition accepted.