CELANESE PAKISTAN LIMITED VS GOVERNMENT OF PAKISTAN, 2002 PTD-KARACHI-HIGH-COURT-SINDH 2874 (2002)

(a) Words and phrases‑‑‑

‑‑‑ Components are those parts that if machinery is broken down or separated into its component parts, one should be able to reconstruct the machinery by putting together the broken or separated components.

Chamber's Dictionary, 1994 Edn., p.392; The Illustrated Heritage Dictionary, 1977 Edn. p.273; Concise Oxford Dictionary, Ninth. Edn., 1998, p.272 and Chambers 21st Century Dictionary, 1996 Edn. ref.

(b) Customs Act (IV of 1969)‑‑‑

‑‑‑S. 19‑‑‑Sales Tax Act (VII of 1990), S. 13 ‑‑‑ Notification S.R.O. 484(I)/92, dated 14‑5‑1992‑‑‑Exemption from sales tax and customs duty‑‑‑Treatment of Heat Transfer Oil a component part of plant/ machinery for production and purification of Di‑Octyl Phthalate, Phthalic. Anhydride and Malaic Anhydride‑‑‑Validity‑‑‑If Heat Transfer Oil is separated, kept aside or retained and not put back in its place, the machine would be incomplete and inoperable and would not produce the desired result‑‑‑Heat Transfer Oil is therefore, an essential component part of the machine used for production and purification of Di‑Octyl Phthalate, Phthalic Anhydride and Maleic Anhydride.

(c) Words and phrases‑‑‑

‑‑‑‑"Catalyst"‑‑‑Defined‑‑‑Catalyst is basically an agent which by its presence promotes a chemical reaction without ultimately losing its chemical character‑‑‑To promote the chemical reaction, the catalyst has to be present in the container alongwith other chemicals.

(d) Customs Act (V of 1969)‑‑‑

--‑S. 19‑‑‑Sales Tax Act (VII of 1990), S.13‑‑‑Notification S.R.O. 484(I)/92, dated 14‑5‑1992‑‑‑Exemption from sales tax and customs duty‑‑‑Heat Transfer Oil acts as catalyst to alter rate of chemical reaction and is not consumed in process for production and purification of Di‑Octyl, Phthalic Anhydride and Maleic Anhydride‑‑‑Validity‑‑‑In such process Heat Transfer Oil is not present with the other chemicals and does not take part in the chemical reaction or acts as a catalyst‑‑‑Oil is used as a medium of heat for the reaction i.e. it is used for heating the reactor to a very high temperature which promotes the chemical reaction resulting in the production of Di‑Octyle Phthalate etc.‑‑‑Heat Transfer Oil does not act as a catalyst but as a medium of heat in the process of production and purification of Di‑Octyle Phthalate, Phthalic Anhydride and Maleic Anhydride.

Engro Chemical Pakistan Limited v. C.B.R. and another C. P. No.D‑193 of 1993 distinguished.

(e) Customs Act (IV of 1969)‑-‑

‑‑‑‑S. 19‑‑‑Sales Tax Act (VII of 1990), S.13 ‑‑‑ Notification S.R.O. 484(I)/92, dated 14‑5‑1992‑‑‑Exemption from customs duty and sales tax‑‑‑Heat Transfer Oil was imported as a component part of the machinery/plant used for production and purification of Di‑Octyle Phthalate, Phthalic Anhydride and Maleic Anhydride‑‑‑Authorities denied exemption for the reason that the Oil was not a component part of the machinery/plant as the same was neither fixed nor connected with the machinery‑‑‑Validity‑‑‑Although Heat Transfer Oil was not fixed to the machinery as an immovable part thereof, yet the Oil was identifiable as for use in or with the machinery because the machinery could not work and produce the desired result without it‑‑‑Not necessary for all component parts of the machinery to be in the same solid form as the machinery itself‑‑‑High Court illustrated the example of a car engine which included `bushes' and `washers' which were made of rubber and other materials‑‑‑Just because `bushes' and `washers' which were made of rubber and other material, it could not be argued that these items were not components of car machinery in which they were used‑‑‑To be a component part of a machinery, the part need not be in solid states and that it could be in "lid, fluid or gaseous form‑‑‑As without Heat Transfer Oil, the Petrochemical Plant would not produce the end product, therefore, it was an essential component part of the machinery as defined in the Notification S.R.O. 484(I)/92, dated 14‑5-1992‑‑ Heat Transfer Oil was a component of the plant/machinery used for production of Di‑Octyl Phthalic Anhydride and Maleic Anhydride and was exempted from customs duty and sales tax in circumstances.

(f) Customs Act (IV of 1969)‑‑‑

‑‑‑‑S. 19‑‑‑Sales Tax Act (VII of 1990), S.13‑‑‑Notification S.R.O. 484(I)/92, dated 14‑5‑1992‑‑‑Constitution of Pakistan (1973), Art. 199 Constitutional petition‑‑‑Vested right‑‑‑‑Locus poenitentiae, principle of‑‑ Applicability‑‑‑Exemption from customs duty and sales tax ‑‑‑Heat Transfer Oil was imported as a component part of the machinery/plant used for production and purification of Di‑Octyl Phthalate, Phthalic Anhydride and Maleic Anhydride‑‑‑On the permission of part shipment granted by Government of Pakistan the petitioner established a letter of credit for import of the plant and machinery for the petrochemical project in question‑‑‑When the petitioner paid for and imported the same the Central Board of Revenue by its letter confirmed that Heat Transfer Oil was covered in the definition of machinery‑‑‑Subsequently after import of the Oil another letter was issued by Central Board of Revenue wherein the Heat Transfer Oil was excluded from the definition of component part of machinery as mentioned in the Notification S.R.O. 484(I)/92, dated 14‑5‑1992 and the Authorities denied exemption‑ Contention of the petitioner was that once the permission was granted and the Oil was declared as a component part, same could not be rescinded as vested right had accrued in favour of the petitioner‑‑ Validity‑Vested right in favour, of the petitioner came into existence when the letter of credit had been established by the petitioner‑‑‑Such right could not be withdrawn later by Central Board of Revenue‑‑ Central Board of Revenue could not afterwards hold that Heat Transfer Oil was not covered under the definition of machinery‑‑‑Law does not vary with the foot of the officer of the Central Board of Revenue‑‑ Authorities could not be allowed to blow hot and cold as and when they liked‑‑‑Government of Pakistan having allowed part shipment and Central Board of Revenue having once formed an opinion and having communicated the same in black and white to its officers and to the petitioner, they could not be permitted to change their opinion according to their whims and fancy‑‑Authorities must always act within the bounds of law‑‑‑Subsequent letter by Central Board of Revenue to the petitioner was, prima facie, mala fide, without jurisdiction and was not applicable to the case of the petitioner‑‑‑Heat Transfer Oil was a component part of plant and machinery of the petrochemical project ,set up by the petitioner and,, therefore, qualified for exemption under S.R.O. No.484(I)/92, dated 14‑5‑1992‑‑‑Constitutional petition was allowed in circumstances.

Muhammad Naeem for Petitioner.

Syed Tariq Ali, Federal Counsel for Respondent No. 1.

Shakeel Ahmed for Respondents Nos. 2 and 3.

S.D. Rana for Respondent No.4.

Dates of hearing: 10th May, 2001; 18th February, 4th March, 2002.

JUDGMENT

S. AHMED SARWANA, J.‑‑‑In 1994 the petitioner imported from a German company machinery for a complete petrochemical project to be established in Sheikhupura. As the plant was designed through numerous vendors of different origins and it was not possible to organize shipment of the complete plant and machinery in one or two lots, the supplier proposed 14/15 partial shipment from various countries starting from South Korea around mid‑December, 1993 and ending around August, 1994. The supplier specifically advised that they would despatch the Heat Transfer Oil for the first filling of the reactors shortly before the commencement of production. The Government of Pakistan therefore permitted part shipment of the machinery which arrived in Pakistan accordingly: As the plant and machinery were exempted from Customs Duty and Sales Tax under S.R.O. No. 484(I)/92 dated 14‑5‑1992 the consignments consisting of different parts of the plant and machinery imported on various dates were cleared without payment of any duty and tax. In July, 1994, the petitioner received a consignment of 261 drums of Heat Transfer Oil which was provisionally released upon furnishing a Bank Guarantee in the sum of Rs. 4,781,000 by ANZ Grindlays Bank, Karachi (respondent No.4) in favour of the Collector of Customs (respondent No.3) as a difference of opinion on the applicability of the Notification in respect of the said goods arose between the parties. A lengthy correspondence took place between the petitioner, the Central Board of Revenue ("C.B.R.") and the Collector Customs on the question whether Heat Transfer Oil was exempted from payment of Customs Duty and Sales Tax under the aforesaid S.R.O. When respondent No.3 threatened to encash the Bank Guarantee, the petitioner filed C.P. No. D‑744 of 1995 which was admitted for Regular Hearing on 15‑5‑1995 and the encashment of the Bank Guarantee was stayed. It appears that while the said petition was pending C.E.R. (respondent No.2) reconsidered the issue favourably and by their letter dated 19‑9‑1996 addressed to the Collector of Customs‑Appraisement (respondent No.3), advised that "heat transfer oil and salt melt, etc. even if imported separately for the sake of security/convenience may be treated as part of the machinery". On 30‑10‑1997 when the matter came up for Regular Hearing the petitioner's counsel produced a copy of the aforesaid letter and consequently, the Court disposed of the said petition in light of the letter dated 19‑9‑1996 addressed by C.B.R. to respondent No.3, referred to above directing the petitioner to seek orders from C.B.R. in line with the contents, of the said letter. The petitioner accordingly approached Central Board of Revenue for release of the Bank Guarantee but were advised by C.B.R. by letter dated 3‑1‑1998 that the case had been re‑examined in light of the explanatory notes of the harmonized system and it was held that the heat transfer oil is not covered under the definition of machinery. The relevant part of the C.B.R. letter dated 3‑1‑1998 communicating decision reads as follows:‑‑‑

"SUBJECT: IMPORT OF HEAT TRANSFER OIL FOR .THE FIRST FILLING OF REACTOR VIDE CIVIL PETITION No.744 OF 1995, DATED 17‑4‑1995 IN THE HIGH COURT OF SINDH, KARACHI.

I am directed to refer to you letter No. Nil dated the 4th December, 1997 on the subject noted above. The case has been re‑examined in the Board in the light of explanatory notes to the harmonized system.

2. It is held; after due deliberations that heat transfer oil is not covered under the definition of machinery and hence not covered under the concessionary regime. The Board therefore, withdraws its Letter C. No. 1(35)Mach/90 dated 19th September, 1996."

This petition has been filed to challenge the decision dated 3‑1‑1998 of C.B.R. (respondent No.2) holding that Heat Transfer Gil is not covered under the definition of machinery as given in S.R.O. 484(I)/92 dated 14‑5‑1992.

In support of the petition, the petitioner has filed several documents including invoices, letters and certificates from the Supplier and an Affidavit of one Saifur Rehman, 'Production Manager of the Petitioner‑Company to the effect that Heat Transfer Oil for the first filling of the reactors is an integral part of the plant and is used to heat the reactors to produce and purify the product Di‑Octyl Phthalate, Phthalic Anhydride and Maleic Anhydride manufactured by the petitioner‑Company. In the affidavit he has also stated that the Heat, Transfer Oil acts more or less like a catalyst and in the process does not undergo any change itself.

We have heard the arguments of Mr. Mohammad Naeem, learned counsel for the petitioner, Mr. Syed Tariq Ali, Federal Counsel and Mr. Shakeel Ahmed for respondents Nos. 2 and 3 and have perused the relevant documents and copies of two judgments of this Court in C. P. No. D‑1093 of 1993 and C.P. No. D‑1188 of 1993 filed by the petitioner's counsel in support of the petition.

The question involved in the petition revolves around the interpretation of S.R.O. 484(I)/92 dated 14‑5‑1992 whereby Federal Government was pleased to exempt such plant and machinery as is not manufactured locally and is imported during the period commencing on the 1st December, 1990 and ending on 30th June, 1995 for setting up new units and for expansion or balancing, modernization and replacement of existing units on the terms and conditions specified in the Notification. The Notification granting exemption describes the term `machinery' in the following words:

"For the purpose of this notification, machinery shall mean‑

(i) machinery operated by power of any description, such as is used in any industrial process .including mining and extraction of timber;

(ii) apparatus and appliances, including metering and testing apparatus and appliances specially adopted‑for use in conjunction with machinery specified in item (i) above;

(iii) power generating plant for operating item (i) above;

(iv) mechanical and electrical control and transmission gear adapted for use in item (i) above; and

(v) component parts of machinery as specified in items (i) and (ii) identifiable as for use in or with such machinery." (Emphasis added)

Mr. Muhammad Naeem, learned counsel for the petitioner contended that Heat Transfer Oil imported by the petitioner from the supplier of the plant and machinery is a component part of the machinery as specified in item (v) of the S.R.O. 484(I)/92 dated 14‑5‑1992 and, accordingly the petitioner is entitled to the benefit of the exemption: He argued that the Heat Transfer Oil is an essential component of the machinery which is used as Heat Transfer Medium to raise the temperature in the reactors which contain the .necessary chemicals to be heated which after undergoing chemical reaction produce and purify Di- Octyl Phthalate etc. and that the product cannot be manufactured without heating the reactor for which Heat Transfer oil is essential. He further contended that the Heat Transfer Oil is not consumed and acts more or less like a catalyst and in the process does not go through any change in itself. It is thus a component, part of the machinery as described in item (v) of the S.R.O.

Mr. S. Tariq Ali, learned Federal Counsel on the other hand argued that Heat Transfer Oil is not a component part of the machinery as it is neither fixed nor connected with the machinery. It is in liquid form and cannot by any stretch of imagination be regarded as machinery. He stressed that to be a component part of the machinery, the part must be like the .machine itself which is in solid form.

Mr. Shakeel Ahmed, learned counsel for respondents Nos.2 and 3 sought two adjournments to bring a copy of the Explanatory Notes to the Harmonized System in defence of the impugned Circular dated 3‑1‑1998 withdrawing the earlier letter of 19‑9‑1996 under which the Heat Transfer Gil was held to be a part of Machinery exempted from payment of Customs Duty and Sales Tax but he neither produced any book any photocopy from the relevant page thereof or advanced any argument to justify the C.B.R. letter of 3‑1‑1998.

Mr. S.D. Rana, learned counsel for the Bank, did not address the Court as he was only a formal party and no relief had been claimed against the Bank.

There is no dispute that the machinery as described in item (i) and the apparatus and appliances as described in item (ii) of S.R.O. 484(I)/92, dated 14‑5‑1992 have been exempted by the Government from payment of Customs Duty and Sales Tax, however, any component part of the machinery to qualify for exemption must fulfil the requirements laid down in item (v) of the said S.R.O. Item (v) clearly states that for the purpose of the said notification machinery shall mean "component parts of machinery as specified in items (i) and (ii) identifiable as for use in or with such machinery" (Emphasis added). The component part of the machinery, therefore, must be identifiable as for use in or with item (i) which is machinery operated by power of any description used in any industrial process or item (ii) which refers to apparatus and appliances specially adopted for use in conjunction with machinery specified in item (i). The Heat Transfer Oil is no doubt identifiable as for use in or, with such machinery but it must also fulfil the first criteria of item (v) i.e. it should be a component part of the machinery or apparatus as specified in items (i) and (ii) of the Notification. The term `component' has not been defined in the S.R.O. It would therefore, have to be given the ordinary dictionary meaning. Now according to the Chambers' Dictionary, 1994 Edition, page 392, "component" means "one of the parts or elements of which anything is made up or into which it may be broken down". The Illustrated Heritage Dictionary, 1977 Edition, page 273, defines "component" as "a part of a mechanical or electrical complex". The Concise Oxford Dictionary, Ninth Edition, 1998 page 272, defines "component" as a part of a larger whole, esp. part of a motor vehicle" while Chambers 21st Century Dictionary, 1996 Edition, defines it as "any of the parts or elements that make up a machine, engine, instrument etc." In light of the above definitions, it may be reasonably stated that if, the machinery is broken down or separated into its component parts, one should be able to reconstruct the machinery by putting together the broken or separated components. In the instant case,' if the machinery i. e. the reactor alongwith its connected apparatus wherein the chemical reaction takes place to. produce Di‑Octyle Phthalate is broken down or separated into parts, all such parts can be put together or reassembled to bring back into shape the original complete working contrivance or machine for the production of Di‑Octyle Phthalate etc. One of parts ‑ which would be put back for the working of the machine would naturally be Heat Transfer Oil. If the Heat Transfer Oil is separated, kept aside or retained and not put back in its place, the machine would be incomplete and inoperable and would not produce the desired result. It is therefore, an essential component part of the machine described in item (i) of the Notification.

The argument of Mr. Naeem, learned counsel for the petitioner that the Heat Transfer Oil acts as a catalyst to alter the rate of the chemical reaction and is not consumed in the process does not appeal` to be correct. A catalyst is basically an agent which by its presence promotes a chemical reaction without ultimately losing its chemical character. To promote the chemical reaction the catalyst has to be present in the container alongwith other chemicals. In the present case, Heat Transfer Oil is not present with the other chemicals and does not take part in the chemical reaction or act as a catalyst but as the name itself suggests and as has been urged by the learned counsel, it is used as a medium of heat for the reaction i.e. it is used for hearing the‑tractor to a very high temperature which promotes the chemical reaction resulting; in the production of Di‑Octyle Phthalate etc.

The judgment in the case of C. P. No. D‑1093 of 1993, Engro. Chemical .Pakistan Limited v. C.B.R. and another, wherein it was held that a catalyst is a component of the machine is distinguishable from the present case as Heat Transfer Oil admittedly does not act as a catalyst but as a medium of heat.

Mr. Tariq Ali contended that Heat Transfer Oil is not a component part of the machinery as it is neither fixed nor connected with the machinery. There is no doubt that Heat Transfer Oil is not fixed to the machinery as an immovable part thereof, however, the argument advanced is not correct as it overlooks the definition of machinery stated in the S.R.O. reproduced above. As already explained, the Heat Transfer Oil is clearly identifiable as for use in or with the machinery because the machinery cannot work and produce the desired result without it. His other argument that to be a component part of .the machinery, the part must be like the machinery itself which IS solid in form is also not tenable. It is not necessary for all component the machinery to be in the same solid form as the machinery itself. A car engine includes "bushes" and "washers" which are made of rubber and other materials. Just because bushes and washers are made of rubber and other material, it cannot be argued that these items are not components of the car machinery in which they are used. We may clarify that to be a component part of a machinery, the part need not be in solid state and that if can be in solid, fluid or gaseous form.

Nowadays many automobiles are equipped with power steering and power brakes. These are based upon hydraulic compressor system in which special oil/fluids blended for the purpose are used. If the special oil/fluid is taken out from the apparatus, the latter would cease to work/operate. The special oil/fluid is thus a component part of the compressor system. Another good analogy would be to consider the Heat Transfer Oil like motor oil or brake fluid. When you purchase a car it comes with both the motor oil and the brake fluid as part of the car. The engine oil and the brake fluid are vital and essential components of the car as the engine would not operate without the engine oil and the brakes would not work without the brake fluid. The supplier of the machinery for the Project in their letter dated 5th July, 1‑994 emphasized the essential need and requirements of Heat Transfer Oil in the following words:

"In the DPO/MA/PA plant of Ravi Chemicals Ltd. located at Sheikhpura, Pakistan two different types of heat transfer oil are required:

(1) Shell Oil 3511

(2) Santotherm 66/Gilotherm TH

The physical and chemical properties of the two brands listed above are such that they are the most suitable ones for process requirement of DOP/MP/PA plants designed by our company and generally used in such plants. In addition to that we certify that the process calculations performed by us for the related equipment are based on the physical properties of the above oil qualities and that the use of other types of oil would mean improper function of the related equipment and by that of the entire plant. Even more critical is the potential chance of oil decomposition leading to choking the heat exchangers and pipelines in service. For the above reasons and in order to achieve the plant performance parameters guaranteed in our control with Ravi Chemicals it is mandatory to use the oil brands as indicated and not to replace them by other types."

From the literature produced by the petitioner and the above discussion, it is clear that the plant and machinery in question cannot operate and produce the end product Di‑Octyle Phthalate etc. Without the Heat Transfer Oil providing the stable temperature heat bath in the reactor. It may be stated that the Heat Transfer Oil is not a cosmetic component of the machine like the beautifully designed wheel caps or blinking rear lights in a Rolls Royce or a BMW. A car can run without the wheel caps and blinking lights but it cannot operate without the engine oil or the brake fluid. In the present circumstances, the Heat Transfer Oil is not like the wheel caps or blinking lights of a Rolls Royce but it is like its engine oil or brake fluid which are component parts of the car machinery which are identifiable as for use in or with such machinery without which the Petrochemical plant will not produce the end product for which it has been set up. In our opinion, the Heat Transfer Oil is an essential component part of machinery as defined in S.R.O. 484(I)/92, dated 14‑5‑1992.

It may not be out of place to state here that the plant and machinery for the Project were exempted from payment of Customs Duty and Sales Tax and Government of Pakistan permitted part shipment of the Petrochemical Project which consisted of plant and machinery as the same were to be imported from different parts of the world and were cleared without payment of any Duty or Tax. However, the Heat Transfer Oil was provisionally released on furnishing of a bank guarantee as a difference of opinion arose between the parties whether it was a component part of the machinery for the Petrochemical Project. The said goods were imported on the clear understanding given the C.B.R. that they were exempted from payment of Customs Duty and Sales Tax and by letter, dated 19‑9‑1996. C.B.R. (respondent No.2) clarified that "Heat Transfer Oil and Salt Malt, etc. even if imported separately for the sake of security/convenience may be treated as part of the machinery" (emphasis added). The plant and machinery for the Project was admittedly imported in parts, inter alia, for the sake of convenience. Consequently, on 30‑10‑1997 the petitioner withdrew C.P. No.D‑744 of 1995 which it had filed against the respondents. A vested right in favour of the petitioner came into existence when on the permission of part shipment granted by the Government of Pakistan, the petitioner established a letter of credit for import of the plant and machinery for the Petrochemical Project in question, when they paid for and imported the same and when C.B.R. by its letter dated 19‑9‑1996 confirmed that Heat . Transfer Oil is covered in the definition of machinery. This right could not be withdrawn later by C.B.R. The contention of respondents Nos.1 to 3 that C.B.R. after due deliberations had held that Heat Transfer Oil is not covered under the definition of machinery is not tenable. It is well established in Pakistan that law does not vary with the foot of the officers of the C.B.R. The latter cannot be allowed to blow hot and cold as and when they like. The Government of Pakistan having allowed part shipment and C.B.R. having once formed an opinion and having communicated the same in black and white to its officers and to the petitioner, they cannot be permitted to change their opinion according to their whims and fancy. They must always act within the bounds of law. The impugned letter, dated 3‑1‑1998 written by C.B.R. to the petitioner is, prima facie, mala fide as far as the present case is concerned. Accordingly, we have no hesitation in holding that C.B.R. letter, dated 3‑1‑1998 is without jurisdiction and not applicable to the case of the petitioner.

In view of the above discussion, we allow the petition and hold that C.B.R. letter dated 3‑1‑1998 is not applicable to the circumstances of this case and that the Heat Transfer Oil is a component part of plant and machinery of the Petrochemical Project set up by the petitioner and therefore, qualifies for exemption under S.R.O. No.484(I)/92, dated 14‑5‑1992.

In the circumstances of the case, there will be no orders as to costs.

Q.M.H./M.A.K./C‑52/KPetition allowed.