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

----S. 3, 33, 34 & 2(33)---Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S.9---Demand of sales tax alongwith additional tax and penalty on cotton seed oil cake without trying to analyze the manufacturing processes of complainant/assessee and without determining whether or not oil cakes were being produced in the process involved in the complainant/assessee's manufacturing plants- Validity---Order-in-Original passed did not deal with the basic issue raised by the complainant/assessees that they did not manufacture oil cakes either as intermediary product or as a final product---Was necessary that all the issues, especially the complainant/assessee's contention that they did not manufacture oil cakes were required to be considered and, definitive findings given' after proper verification of the process involved one way or the other on the merits of cases---Orders were improper in that these failed to deal with basic issues raised by the complainants/asses sees, especially the issue that no oil cake was produced during the process of extraction of oil--Federal Tax Ombudsman recommended that the Central Board of Revenue should open the Order-in-Original No.827 of 2002, dated 19-8-2002 and 692 of 2002, dated 6-7-2002 under S.45A of the Sales Tax Act, 1990 and direct the concerned Collectors of Adjudication to pass fresh speaking orders in accordance with law based on proper examination and discussion of the arguments/issues, especially the issue whether or not the complainants produced oil cakes, raised by the complainants and after giving them the opportunity of being heard.

2001 SCMR 1375 ref.

Mujhaid Eshai, FCA Riaz Ahmad; Tax-Consultant for the Complainants.

Dr. Muhammad Adrian Akram, D.C. Sales Tax (Adjudication), Multan for Respondent.

FINDINGS/ORDERS

The two complaints are identical in nature involving common points of law and. facts and are being disposed of together by this order.

2. The complainants have alleged maladministration against the Collectors of Adjudications, Multan for initiating illegal proceedings by issuing show-cause notices, dated 27-4-2002, asking them to pay sales tax alongwith additional tax, penalty etc. on cotton seed oil cakes, despite the fact that they do not manufacture oil cake (khal). Relevant facts briefly stated by the complainants are that they do not manufacture oil cake (khal) during the manufacturing processes of their solvent plants. The raw material, is purchased from the market, During the process of production of delinted cotton and separation' of bran there remains only kernel of cotton seed (giri), which cannot produce khal because the bran separated in the process is a necessary ingredient for production of khal. For production of khal some. percentage of oil is also required but in their process total oil is extracted and the balance residue is unable to produce khal. Despite the above mentioned processes they have been saddled with liability of sales tax alongwith additional tax etc. for oil cakes allegedly produced and consumed by them. The sales of their other products are duly verified and tax adjusted against input claim. Sales tax can be charged only on supplies as defined in section 2(33) of the Sales Tax Act, 1990. They have not made any supply of oil cakes. The respondents have also ignored the procedure prescribed under Ginning Industry Rules, 1996. No Order-in-Original was received in the case of Complaint No.1370/L/2002. They applied for Order-in-Original vide application, dated 21-10-2002 and the copy of order was provided on 24-10-2002. During the hearing before the Adjudicating Officer their representative had explained to him verbally that in the processes being carried out in their plants there was no question of manufacturing oil cakes but their contentions were not given any weight by the Adjudicating Officer. The respondents have rejected their cases relying on the decision given in the case of Messrs Konya Industries, Multan. Their cases are different from that of Messrs Konya Industries. The two cases are not parallel. The Revenue Division may be directed to drop the illegal proceedings. The Orders-in-Original may be declared illegal. The complainants may be given reasonable compensation as permitted under law.

3. In the written reply the respondents have pointed out that since the Orders-in-Originals have already been passed in the cases and the complainants have legal remedies available to them under section 46 of the Sales Tax Act, 1990, they may file appeals before the Customs, Sales Tax and Central Excise, Appellate Tribunal. They have not exhausted the available remedy Manufacturing process is a technical subject. The Collectorate of Multan can do factual inquiry. No comments can be offered on the manufacturing processes of the complainants. The show -cause notices were legally issued. In an identical case namely Messrs Konya Industries, Multan, Order-in-Original was passed and the unit preferred an appeal before the Appellate Tribunal. The Tribunal rejected the appeal vide, order STA/902/LB/2000, dated 6-9-2001. Later on, the Lahore High Court also rejected Messrs Konya Industries Multan's appeal vide order in Customs Appeal No.21 of 2001, dated 5-12-2001. Despite five hearings fixed in, the case the complainants did not submit any written reply in Complaint No.1370-L/2002. The Order-in-Original was dispatched by registered post in Complaint No.1370-L/2002, which was not returned as undelivered. Self-consumption of taxable goods falls within the definition of supply/sales under section 2(33)of the Sales Tax Act, 1990 a. already held by the Honourable Supreme Court in respect of aggassee produced by the Sugar Mills and by the Lahore High Court in respect of oil cakes produced by Messrs Konya Industries. The complainants units and that of Messrs Konya Industries are solvent plants both having identical machinery, involving similar manufacturing processes, The show-cause notices and the Order-in-Original were lawful. There is no maladministration. The complaints may be dismissed.

4. In the rejoinder filed by the complainants, they have pointed out that the respondents admitted in their reply that factual inquiry can be done by the Collectorate of Sales Tax which means that the orders passed by the Adjudicating Officers are not based on factual determination of the facts before framing show-cause notices or deciding the cases. As for the respondents reliance on the decision passed in the case of Messrs Konya Industries and its confirmation by the Appellate Tribunal and the Lahore High Court, the FTO has already observed in decision given on Complaints No.639 and 865 of 2002 that findings in one case could not be used as a tool in another case. The Adjudicating Officers should have dealt with complainants' cases on their own merits. By not doing so they have it indulged in maladministration. As for respondent's argument that self-consumption of taxable goods falls in the definition of supply/sales under section 2(33) of the Sales Tax Act, 1990, it is submitted that unlike oil cakes produced by oil expellers and sold by them in the market, the material in process in the solvent plants is not independently marketable. The raw material consumed in the solvent extraction process has no value as such. The cotton seed is dehalled and delinted and the residue after extraction of oil has no usefulness. It leads to production of poultry meal, which is exempt from sales tax. Raw material in process cannot be termed as a taxation intermediary product. It is not useable.. The orders passed against the complainants also create a liability in respect of the rape seed oil cakes. There is no such thing as rape seed oil cakes. The literature on the subject, spells out the processes involved showing that continuous oil extraction is only capable of producing oil and poultry meal, but it does not produce oil cakes that can be sold in the market. No intermediary product is, therefore, obtained and as such the question of levying tax on an imaginary product of tenable.

5. During the hearing the complainants reiterated the arguments made m the complaints and the rejoinders emphasizing that raw material in process does not constitute a taxable activity. The respondents have not examined the actual processes involved in the extraction of oil. To constitute a supply it must be in a marketable state. A continuous manufacturing process is involved in the extraction of oil from which no such thing as oil cakes are produced. The oil cake, which is saleable in the market. con in hulls, .linters and some oil, which is useful for cattle feed, whereas in the. case of the complainants the seed is dehulled and delinted and is not capable to produce oil cake for use as cattle feed. The residue and only be used as poultry meal. The literature placed on record illustrates/confirms the said statements. The respondents have also created a liability in respect of rape seed oil cake. There is no such thing as rape seed oil cake. Various issues' were raised before the Adjudicating Officers but no weight was given to the complainants arguments and non-speaking orders were passed without any discussion and analysis of the points raised by them. The respondents were also asked to physically check whether or not oil cakes were being manufactured by the complainants but they did not visit the units to verify. There is difference between the processes of oil expellers and the complainants' plants. While oil expellers sell their oil cake in the market the same cannot be equated with the oil solvent plants, as these do not produce oil cake. The respondents. in their haste to decide the case against them did not even do. so much as supply them copies of the audit report an the basis of which contraventions were instituted against them. The complainants were thus unable to examine how the liability was created against them. It was disclosed by the complainants that they had filed appeals against the Order-in-Original before the Appellate Tribunal on 22-12-2002 after the filing of complaints before this forum.

6. The representative of the respondents stated that the issues have been discussed .in the High, Court's Order No.21 of 2001, dated 13-1-2001. The Supreme Court vide their judgment 2001 SCMR 1375 had ruled in the case of Sugar Mills that Baggassee was an intermediary product 'and self-consumption of the same qualifies as a taxable supply. The complainants, however, emphasized that Baggassee is a by product of sugar and is/can be used as fuel. There is no parallel to the case of the complainants. The respondents stated that the processes involved in the case of the complainants are the same as those of Messrs Konya Industries, Multan and the two are identical cases. Intermediary products are taxable and were accordingly dealt with. As for the rape seed oil cake, the liability against the complainants were created because the complainants produced oil cakes both from rape seed and cotton seed.

7. The arguments of the parties and the records of the cases have been examined and considered. The complainants operate solvents plants for extraction of oil from cotton and rape seeds. The respondents claim that while extracting of oil from the seeds the complainants also produce oil cakes by way of an intermediary product, which constitutes a taxable activity and is, therefore, , liable to tax even if these are used within the plants. The complainants deny producing and selling oil cakes. The respondents contend that even if the cakes are not sold in the market and are self-used/consumed in the continuous process of manufacture these are taxable. After issuing the show-cause notices the Collectors of Adjudication, Multan have vide their Orders-in-Original No.827.of 2002, dated 19-8-2002 and 692 of 2002, dated 6-1-2002 ordered payment of sales tax alongwith additional tax and penalty, etc. for suppression of the production. and for consumption of cotton seed oil cake and rape seed oil cakes in exempt supplies. While deciding the cases, the Adjudicating Officers have relied basically on the Order No. 487-488 of 2000, dated 13-12-2000 passed against Messrs Konya Industries, Multan which was subsequently confirmed-by the Appellate Tribunal and the Lahore High Court. The complainants main objection is that the respondents should not follow the decision made in the case of Messrs Konya Industries, Multan as their cases deserve independent examination. They had explained to the Adjudicating Officers various processes of manufacture and also requested them to visit the factory to see the working- of the solvents plants and to check whether or not oil cakes were produced but their requests were not agreed to. A huge liability has been created without considering the points of view of the complainants and without analyzing the processes involved to as certain the facts involved in complainant's cases. The orders passed in the two cases are sketchy. For example in the orders passed in the case of Messrs Shujaabad Oil Mills the Adjudicating Officer has observed that the complainant had no defence to offer and the case was decided against the complainant essentially on the ground that a similar case of Messrs Konya Industries had already been decided in favour of the Government by the Tribunal and the High Court. Similarly, in the other case also the issues raised by the complainant especially the issue that their plants do not manufacture oil cakes have not been addressed except that in that case also reliance was placed on the decision passed in the case of Messrs Konya Industries. It would have been only fair and just if the cases of the complainants had been processed independently on their own merit. This was not done. It is an act of maladministration not to consider the points of view of complainants, especially when the complainants claimed that their cases could not be equated with that of Messrs Konya Industries. In each of the two cases the complainants had challenged that the solvent extractors did not manufacture oil cakes which could be verified/physically inspected by the Department. In their written statement the respondents .have, on a point raised by the complainants regarding the manufacturing processes involved have commented that "the manufacturing process is technical subject and requires factual inquiry which can only be done by the Collector of Customs, Sales Tax and Central Excise, Multan" and again "this office is not in a position to comment on the manufacturing processes of the complainants for which Collector Sales Tax, Multan be requested to offer their expert opinion". Both these statements indicate that the Collectors of Adjudication decided the cases without trying to analyse the manufacturing processes of the complainants and without. determining whether or not oil cakes were being produced in the processes involved in the complainants manufacturing plants. That is why both 'the orders are silent on this critical aspect of the case. It has been presumed by the respondents that oil cakes were being manufactured. The complainants have also- produced literature on the subject claiming that during the continuous processes of manufacture of cotton or rape seed oil, no oil cakes are obtained and, therefore, they cannot be burdened with heavy liabilities. The decision. In the complainants' cases has essentially been given on the basis of the case of Messrs Konya Industries. The complainants contest this by claiming that their cases are different. The Orders-in-Original passed ink the two cases do not deal with the basic issue raised by incomplainants that they do not manufacture oil cakes .either as intermediary product or as a final product. It is, therefore, necessary that all the issue, especially the complainants contention that they do not manufacture oil cakes are required to be considered and definitive findings after proper verification of the, processes involved given are way or the other on the merits of cases. The orders passed in each of two cases are improper in that these fail to deal with basic issues raised by the complainants, especially the issue that no oil cake is produced during the process of extraction of oil.

8. Accordingly, it is recommended that the C.B.R.

Open the Orders-in-Original No.82? of 2002, dated 19-8-2002 and 692 of 2002, dated 6-7-2002 under section 45A of the Sales Tax Act, 1990 and direct the concerned Colleetors of Adjudication to pass fresh speaking orders in accordance with law based on proper examination . and discussion of the arguments/issues, especially the issue whether or nor the complainants produced oil cakes, raised by the complainants and aft wing them the opportunity of being heard.

9. Compliance report to a submitted within 30 days of the receipt of this order.

C.M.A./698/FTO/ Order accordingly.