I.T.As. Nos.581 and 582-KB/DB of 2000-2001; decided on 24th September, 2001. VS I.T.As. Nos.581 and 582-KB/DB of 2000-2001; decided on 24th September, 2001., 2002 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1016 (2001)

(a) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S. 80C(2)(a)(ii) & First Sched., Part IV, Para. B‑‑‑Tax on income of certain contractors and importers‑‑‑Manufacturing‑‑‑Industrial undertaking‑‑‑Imported finished goods were subjected to process of labelling, packing and putting on conveyor belt to reduce moisture before packing‑‑‑Taxability of, under presumptive tax regime i.e. under S.80C of the Income Tax Ordinance, 1979‑‑‑Validity‑‑‑Industrial undertaking, whose imports of raw material for its own consumption had been excluded from the ambit o S.80C of the Income Tax Ordinance, 1979, was such a business concern which was engaged in manufacture of goods and material or subjecting of goods and materials to any process, which substantially changed their original scope‑‑‑Import, thus, should be of raw material which ought to be so processed that the final product should be, substantially different from the raw materials used but this exercise did not cover the process of labelling or repacking of the same goods or re‑packing followed after physical process of placing the goods on conveyor belt for reducing moisture‑‑‑Such finished goods were not out of the ambit of S.80‑C of the Income Tax Ordinance, 1979.

(b) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.80‑C‑‑‑Tax on income of certain contractors and importers‑‑ Industrial undertaking‑‑‑Import of raw material for own consumption‑‑‑Manufacturing of such raw material through tool manufacturing under an agreement between the parties at fixed charges‑‑‑Tax was charged under S.80‑C of the Income Tax Ordinance, 1979 on the ground that import of such raw material was not for own consumption of the industrial undertaking ‑‑‑Validity‑‑‑Assessee himself was engaged in a manufacturing activity, and such toll manufacturing was resorted to by him in addition to or beyond his own capacity or available facilities but under his specifications and controls and without divesting himself of the ownership of the raw materials or entitlement to the end products which themselves were subject to his quality control‑‑‑Such manufacturing could be said to be its own manufacturing‑‑‑Processing charges received by the processor had also been accepted for assessment purposes by the Department in his case‑‑‑Effect‑‑‑Application of provisions of S.80‑C of the Income Tax Ordinance, 1979 was not justified and orders of the Authorities below were set aside, holding that such raw material was imported for own consumption and assessment ought to be made under the normal procedure of determining business income.

(c) Income‑tax‑‑‑

‑‑‑‑Disallowance‑‑‑Principle‑‑‑Disallowance out of profit and loss account on the basis of history without giving any reason‑‑‑Validity‑‑‑No disallowance could be made without pointing out defects in the maintenance of account.

Irfan Saadat Khan for Appellant.

Basharat Qureshi, D.R. for Respondent

Date of hearing: 19^th September, 2001

ORDER

MUHAMMAD AKHTAR NAZAR MIAN (ACCOUNTANT MEMBER).‑‑‑The appellant a private limited company is engaged in manufacturing and distribution of pharmaceutical products. During the year under appeal, it imported finished goods which were subjected by the DCIT to presumptive taxation under section $0‑C of the Income Tax Ordinance, 1979. This treatment was confirmed by the CIT(A) in his order impugned before us. The appellant also imported some raw materials which were subjected to the manufacturing process through toll manufacturing i.e. the manufacturing process was carried out not at the business premises of this company but at the business premises of another company namely GETZ Pharmaceutical (Pvt.) Ltd. 'through a contract on payment of processing charges. The Assessing Officer found that‑this import of raw materials was not for own consumption of the industrial undertaking, and therefore, he

charged tax under section 80‑C on the value of raw. materials imported. This treatment was confirmed by the CIT(A) in the order impugned before us. In addition to this the appellant is aggrieved against certain add backs out of P&L expenses, hence these appeals.

2. Both the learned A.R. and the learned D.R. have been heard and orders of the Authorities below perused along with the documents given by the learned D.R. during his arguments. The appeals are decided as below.

Finished goods imported:

3. In respect of finished goods imported by the Company the learned A.R. claims that these are semi‑finished goods because he has to label and pack these medicines and in one case the medicine is put on conveyor belt to reduce moisture before packing. The learned A.R. asserts that it is only after this packing that the goods become marketable.

4. According to the learned A.R. the word "manufacture" has not been defined in the Income Tax Ordinance, and therefore, recourse will have to be made to other laws for seeking its definition. He has referred to the Sales Tax Act, 1990, Drugs Act, 1976. Drugs Licensing. Registering and Advertising Rules, 1976, Blacks Law Dictionary. Aiyer's Manual of Law Terms and Phrases, Mitra's Legal and Commercial Dictionary and new Shorter Oxford Dictionary for the definition of the word "manufacture". We have noticed that in all these documents inclusive definition of "manufacture" has been given whereby the processes of assembling, mixing, bottling, packaging, re‑packing of goods have been included in "manufacture". We are of the view that inclusive definition .is for the purpose of specific enactments and need not be referred to in the income‑tax proceedings where specific interpretation is already available in this statute, as discussed in the following paragraphs.

5. Under the provisions of section. 80‑C(2)(a)(ii) the goods imported by an industrial undertaking as raw material for its own consumption have been taken out of the ambit of presumptive taxation although these goods may have suffered withholding tax under section 50(5) of the Ordinance. Rates for withholding and presumptive taxation have been prescribed in the First Schedule to the Income Tax Ordinance and as per para. B of Part IV of the First Schedule, "industrial undertaking has been defined as under:‑‑‑

B. As used in this Schedule,‑--

(1)"industrial undertaking" means an undertaking which is set up or commenced in Pakistan on or after the 14th day of August, which employs (i) ten or more persons in Pakistan and involves the use of electrical energy on any other form of energy which is mechanically transmitted and is not' generated by human or animal agency; (or (ii) twenty or more persons in Pakistan and does not involve the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency and which is‑

(i)engaged in‑

(a)the manufacture of goods or materials or the subjection of goods or materials to any process, which substantially changes their original condition;

(b)ship-building;

(c)generation, transformation, conversion, transmission or distribution of electrical energy, or the supply of hydraulic power; or

(d)the working of any limine, oil‑well or other source of mineral deposits not being an undertaking to which .the Fifth Schedule applies; or

(ii)any other industrial undertaking which may be approved by the Central Board of Revenue for the purposes of this clause;

6. Thus an industrial undertaking whose imports of raw material for its own consumption have been excluded from the ambit of section 80C is such an undertaking which is engaged in such manufacture of goods and material or the subjection of goods and materials to any process, which substantially changes their original condition. This means that the imports should be raw material which may be so processed that the final product is substantially different from the raw materials thus used. This exclusion, therefore, does not cover the process of labeling or repacking of the same goods or repacking followed after physical process of placing the goods on conveyor belt for reducing moisture. Thus the import of finished goods (or even such semi‑finished goods as the learned A.R. is pleased to term them) are not out of the ambit of section 80C.

7. In this view of the matter, we hold that the CIT(A) was right in maintaining that the provisions of section 80C were applicable to the import of finished goods called semi‑finished goods by the learned A.R. The appeals, therefore, fail on this account.

Raw Materials Imparted and subjected to toll manufacturing:

8. On the second issue of toll manufacturing the learned A.R. as produced before us a copy of the agreement with GETZ Pharmaceutical (Pvt.) Ltd., dated 11th day of December, 1990 to show that the;

(i)The ownership of raw materials has never been transferred from the assessee Principal to the processor.

(ii)The processor is supposed to carry on the tasks by observing the stipulations laid down in the contract and the working instructions placed at the disposal of the processor by the Principal.

(iii)It is the responsibility of the Principal to provide adequate quantities of required raw materials and the processor is required to use exclusively the materials placed at his disposal by the Principal.

(iv)The Principal on the request of the processor is bound to assist him in the production with his experts.

(v)The processor is undertaking the production on behalf of the Principal so that the Principal becomes the owner of the manufactured contract preparations.

(vi)The processor does not acquire any right or title with regard to the documents received from the Principal.

(vii) The raw material, packaging and semi‑finished products have to be tested according to the Principal's specifications and procedures.

(viii)Packaging of the finished products is to start only after the release of such products by the Principal (samples have to be sent by the processor to the Principal and the release decision of the finished products is to be taken by the Principal.

(ix)Processor will dispatch to Principal for each batch of manufactured contract preparations:

‑‑an agreed number of samples taken according to the instructions of Principal.

--in process controls and analysis results.

‑‑manufacturing records and production.

Principal will notify processor of the results of examinations stating at the same time whether the batch in question has been released or rejected. This information should be given as quickly as possible, at the latest three weeks after receipt of the samples. Only after release by Principal will processor deliver the batch to the Principal or to a third person or firm named by Principal, unless any other procedure has been stipulated.

(x) On demand of Principal processor Will send to processor every month list containing all materials used in processing, semi -manufactured goods and finished contract preparations which were in stock on the last day of the month. To be specified in this list are also all entries and outgoing contract preparations and materials during the month. This list is to be sent to the Principal at the latest by 4th day of the following month.

9. The contract which inter alia provides as above, if read in totality leaves no doubt that the raw materials imported by the assessee have been used by the industrial undertaking for its own consumption and only a facility with processor has been utilized at fixed charges. Where the assessee himself is engaged in manufacturing activity, and such toll manufacturing is resorted to by him in addition to or beyond his own capacity or available facilities but under his specifications and controls and without divesting with the ownership of the raw materials or entitlement to the end products which themselves are subject to this quality control, then such manufacturing could be said as its own manufacturing. It has been stated at bar by the learned A.R. that in the case of the processor the processing charges, received by it have been accepted for assessment purposes in that 'case. In this view of the matter, it is held that the authorities below were not justified in holding that the raw materials imported and subjected to toll manufacturing in the circumstances discussed supra were not used for' its own consumption by the industrial undertaking. Application of provisions of section 80Csuch imported raw materials was, therefore, not justified. The orders of the authorities below on this account are hereby set aside to be made de novo in accordance with law so as to exclude from the ambit of section 80C the import of raw material field hereinabove to have been used for own consumption; assessment in this regard may be made under the normal procedure of determining business income.

Disallowances out of Profit and Loss Account:

10. So far as the disallowances out of profit and loss expenses are concerned the assessee rightly claims that these have been disallowed without giving any reasons by the DCIT and have been confirmed by the CIT(A) saying that these are as per history of the case. The learned A.R. has a point that no disallowance can be made without pointing out defects in the maintenance of that account. In view of this position the disallowances made by the DCIT in both the years as contested before us out of repair and maintenance, out of travelling and conveyance 'and out of printing and stationery are set aside to be re‑examined and allowed in accordance with law.

11. Consequently both the appeals succeed to the extent and in the manner indicated above.

C.M.A./M.A.K./219/Tax(Trib.) Appeal accepted.