Messrs SHEIKH SPINNING MILLS LIMITED VS FEDERATION OF PAKISTAN, 2002 PTD-LAHORE-HIGH-COURT-LAHORE 2959 (2002)

(a) Sales Tax Act (VII of 1990)---

----Ss. 7(1) & 8(1)(a)(b)---Input tax, deduction of ---Principles-- Registered person is entitled to deduct input tax in the manner specified in S. 7(1) of Sales Tax Act, 1990, paid on the goods used or to be used for any purpose for manufacture or production of taxable goods or for taxable supplies made or to be made by such person---Federal Government may by a Notification in Official Gazette under the provisions of S. 8(1)(b) of Sales Tax Act, 1990, specify any other goods on which a registered person is not entitled to reclaim or deduct input tax---Once a registered person establishes that the goods in question on which input tax has been paid were used or to be used for the purpose of manufacture or production of taxable goods or for taxable supplies made or to be made by him, then subject to the-terms of S.7 of Sales Tax Act, 1990, such registered person becomes entitled to the deduction of the input tax paid by him for the purpose from the output tax that is due from him in respect of the particular tax period.

(b) Notification---

---- Nullifying express provisions of substantive law by means of notification---Validity---Substantive provisions of law cannot be nullified by Government by means of a notification which by all means is a sub legislative measure.

The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others 1999 SCMR 1442 and Messrs Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others 1993 SCMR 1232 ref.

(c) Sales Tax Act (VII of 1990)---

----S. 8(1)(a)(b)---Notification issued by Federal Government under S.8(1)(b) of Sales Tax Act, 1990---Object---Purpose underlying S.8(1)(b) of Sales Tax Act, 1990, is to enable Federal Government to issue notifications which are clarificatory in nature without in any manner enhancing or curtailing the provisions of S.8(1)(a) of Sales Tax Act, 1990.

(d) Sales Tax Act (VII of 1990)---

----Ss. 7(1), 8(1)(a)(b), 30 & 45---Notification S.R.O. 578(I)/98, dated 12-6-1998---Constitution of Pakistan (1973), Art. 199---Constitutional petition---Alternate remedy---Input tax, deduction of ---Stock-in-trade-- Denial of benefit of S. 7(1) of Sales Tax Act, 1990, on use of diesel-- Petitioners were using diesel generators for production of electricity to be used in their manufacturing units---Federal Government vide Notification S.R:O. 578(I)/98, dated 12-6-1998, had withdrawn the input tax deduction on the use of diesel by the petitioners---Plea raised by the petitioners was that the diesel was stock-in-trade hence they were entitled to deduct input tax from output tax that was due from them in respect of tax period---Validity---Diesel so used by the petitioners did not constitute stock-in-trade---High Court directed the petitioners to approach competent Authority to prove or to demonstrate that the diesel on which they had paid input tax had been used or was to be used for manufacture or production of taxable goods or for taxable supplies made or to be made lay them---Authorities were directed by the High Court to decide the question with reference to the substantive provisions of Sales Tax Act, 1990, and also with reference to Notification S.R.O. 578(I)/98, dated 12-6-1998 and in case there was a conflict between the contents of the notification and the provisions of law; it would be the substantive provisions of Sales Tax Act, 1990, that would prevail---Constitutional petition was disposed of accordingly.

The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others 1999 SCMR 1442 and Attock Cement Pakistan Ltd. v. Collector of Customs, Collectorate of Customs and Central Excise, Quetta and 4 others 1999 PTD 1892 ref.

Syed Mansoor Ali Shah for Petitioner.

Khan Muhammad Virk for Respondents.

Date of hearing: 14th February, 2002.

JUDGMENT

This judgment shall decide Writ Petitions Nos. 3941, 4706, 6422, 6251, 6052, 7630, 7629, 8345, 8346, 11791 and 11734 of 2000 as common questions are involved.

2. The petitioners in all these cases are engaged in the business of manufacturing cotton yarn. According to the writ petitioners they are consumers of electricity which is supplied by WAPDA and also utilize in house electricity produced through the diesel operated .generators and to operate the said generators diesel is purchased from several companies. The price paid for the said diesel includes the sale tax which is paid by the petitioners at the time of purchase of the diesel.

3. The petitioners in all these cases feel aggrieved of Notification S.R.O. 571(I)/98, dated 12-6-1998 issued under section 8(1)(b) of the Sales Tax Act, 1990. The said notification is Annexure D to this writ petition and is reproduced here for facility of reference:-

"In exercise of the powers conferred by clause (b) of sub section. (1) of section 8 of the Sales Tax Act, 1990, and in supersession of Ministry of Finance and Economic Affair's Notification No. S.R.O. 1307(I)/97, dated the 20th December, 1997, the Federal Government is, pleased to specify that the following goons acquired otherwise than as stock-in-trade by a registered person to be the goods in respect of which input tax shall not be claimed, namely:-

(1) Vehicles falling in chapter 87 of the First Schedule to the Customs Act, 1969 (IV of 1969),

(2) Building materials.

(3) Office equipment (excluding electronic (fiscal) cash registers), furniture, fixture and furnishings.

(4) Electrical and gas appliances.

(5) Telecommunication equipments.

(6) Generators and generating sets.

(7) Wires and cables and ordinary electrical fittings.

(8) Crockery, cutlery and utensils, etcetera.

(9) Supply of food, beverages, game fabrics, etcetera and consumption on entertainments.

(10) Gifts and give-aways.

(11) P.O.L. products other than furnace oil, lubricants and greases."

The petitioners particularly feel aggrieved of the Item No.11 of the said notification which was added therein by means of Notification S.R.O. 926(I)/99, dated 16-8-1999.

4. Syed Mansoor Ali Shah, learned counsel for the petitioners in all these cases contends that the notification is discriminatory inasmuch as, according to the learned counsel, the manufacturing concerns using furnace oil for the same purpose have been given a benefit, but the same has been denied to the petitioners using diesel oil for the said purpose, in the matter of claim of input tax; that the notification is ultra vires of section 8(1) of the Sales Tax Act, 1990. According to the learned counsel the notification has been issued in terms of clause (b) of subsection (1) of section 8 of the Sales Tax Act, 1990. The said powers are subject to sub-clause (a) of said section 8(1) and the notification intends to be in contravention of the said sub-clause (a). Relies on the `case of The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others (1999 SCMR 1442); and the said property being a stock-in-trade of the petitioners, the same does not fall within the mischief of said notification. Mr. Khan Muhammad Virk, Advocate for the respondents, on the other hand, argues that the notification is neither discriminatory nor intended to be used as such; that the Federal Government enjoys the power to specify any goods by virtue of section 8(1)(b) of the said Act in respect of which input tax is not to be claimed; and that the said product cannot be said to be stock-in- trade. For this latter argument relies upon the case of Attock Cement Pakistan Ltd. v. Collector of Customs, Collectorate of Customs and Central Excise, Quetta and 4 others (1999 PTD 1892).

5. I have given some thought to the respective contentions of the learned counsel for the parties. I deem it necessary to refer here to some provisions of the Sales Tax Act, 1990, as pointed out by the learned counsel for the petitioners. Section 2(14) defines the input tax. Section 2(20) defines the output tax while section 2(41) defines a taxable supply. Section 7 of the said Act may be reproduced here as it is this provision of law, which provides the benefit, regarding the curtailment whereof the complaint is being made by the petitioners :-

(7) Determination of tax liability. ---(1) For the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall be entitled to deduct input tax (paid(during the tax period) for the purpose of taxable supplies made, or to be made, by him) from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9.

(2) A registered person shall not be entitled to deduct input tax from output tax unless:-

(i) in case of a claim for input tax in respect of a taxable supply made in Pakistan, he holds a tax invoice in respect of such supply for which a return is furnished;

(ii) in case of goods imported into Pakistan, he holds the bill of entry duly cleared by the customs under section 79 or section 104 of the Customs Act, 1969 (IV of 1969).

5A. Section 8 of the Sales Tax Act, 1990, in its term is an exception to the said section 7. Subsection (1) of the said section 8 is reproduced here:-

8. Tax credit not allowed.---(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on--

(a) the goods used or to be used for any purpose other than for taxable supplied made or to be made by him,

(b) any other goods which the Federal Government may by a Notification in the official Gazette, specify (and)

(c) on the goods under subsections (IA) and (5) of section 3.

Said clause (a) stands substituted by section 5 of the Ordinance VII of follows:---

(a) the goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him:, and

5B. A reading of the said provisions of Sales Tax Act, 1990 shows that a registered person is liable to pay input tax levied under the said Act on the supply of goods received by him, or levied under the said Act on the goods imported, entered and cleared under section 79 or section 104 of the Customs Act by the said person. Under section 2(20) output tax is charged in respect of supply of goods made by a registered person. Section 7 entitles a registered person to deduct the said input tax paid during the tax period for the purpose as taxable supplies made or to be made by him from the output tax that is due from him in respect of that tax period. Now section 8(1)(a) lays down that the said registered person shall not be entitled to reclaim or to deduct input tax paid on the goods used or to be used for any purpose other than for taxable supplies made or to be made by him. By virtue of a later amendment the manufacture and production of taxable goods has also been included.

6. A reading of the said section 7(1) in juxtaposition to section 8(1)(a) leads to the conclusion that a registered person shall be entitled to deduct input tax in the manner specified in section 7(1) paid on the goods used or to be used for any purpose for the manufacture or production of taxable goods or for taxable goods or for taxable supplies made or to be made by him.

7. Now clause (b) of subsection 8(1) lays down that the Federal Government may by a Notification in the official Gazette specify any other goods on which a registered person shall not be entitled to reclaim or deduct input tax.

8. The question that arises in these cases is as to whether the express provisions of substantive law can be nullified by the Federal Government by means of a notification which by all means is a sub-legislative measure. To my mina the answer to the said question must be .in the negative as laid down by the Honourable Supreme Court of Pakistan in the said case of The Central Board of Revenue, Islamabad v. Sheikh Spinning Mills Limited, Lahore and others (1999 SCMR 1442). Chief Justice Ajmal Mian (as his Lordship then was) with reference to the earlier dictum in the case of Messrs Central Insurance Co. and others v. The Central Board of Revenue, Islamabad and others (1993 SCMR 1232) observed as follows in para. 6 of the report:-

"It seems to be well-settled proposition of law that the Central Board of Revenue, or for that matter even the Federal Government, cannot control or curtail judicial adjudication power vested in the forums provided under the relevant law by giving a particular interpretation to a particular provision of the relevant law or by issuing Notification/S.R.O. for that purpose.

9. Applying the said rule to the present case, once a registered person establishes that the goods in question on which input tax has been paid were used or to be, used for the purpose of manufacture or production of taxable goods or for taxable supplies made or to be made by him, then subject to the terms of section 7 he becomes entitled to the deduction of the said input tax paid by him for the said purpose from the output tax that is due from him in respect of the particular tax period.

10. I am not inclined to agree with the said first and the third contention of the learned counsel for the petitioners. As stated by me above the purpose underlying sub-clause (b) of section 8(1) of the Sales Tax Act, 1990, is to enable the Federal Government to issue notifications which are clarificatory in nature without in any manner enhancing or curtailing the provisions of sub-clause (a) of the said section 8(1). An element of discrimination, therefore, does not come in. As to the said third contention of the learned counsel for the petitioners, apart from the fact that the same cannot be relevant to the controversy involved in these writ petitions, I find that the contention of Mr. Khan Muhammad Virk, Advocate that the said product may not constitute a stock-in-Trade finds support from the said judgment in the case of Attock Cement Pakistan Ltd. v. Collector of Customs, Collectorate of Customs and Central Excise, Quetta and 4 others (1999 PTD 1892) being relied upon by the learned counsel.

11. In the light of the above discussion these writ petitions are disposed of with the direction that the petitioners to approach the competent Authority appointed under section 30 read with section 45 of the Sales Tax Act, 1990 who shall give them an opportunity to prove or to demonstrate that the said product i.e. diesel on which they have paid input tax has been used or is to be used for the manufacture or production of taxable goods or for taxable supplies made or to be made by them. The said officer or authority shall then decide the question with. reference to the substantive provisions of the Sales Tax Act, 1990 referred to above as also the said S.R.O. 578(I)/98, dated 12-6-1998 and in case there is a conflict between the contents of the said S.R.O. and the said provisions of law, it will be the said substantive provisions of the Sales Tax Act, 1990 that will prevail.

12. No orders as to costs.

Q.M.H./M.A.K./S-395/LOrder accordingly.