Sales Tax Act (VII of 1990)---

----Ss. 2(14), 2(44), 3(1), 6(8), 7(1), 11(2), 33, 34, 36 & 46---General penalties and additional tax---Imposition of---Appeal to Appellate Tribunal---Auditors, during course of audit of record of appellant having pointed out certain discrepancies and irregularities, Adjudication Officer, in the light of report of Auditors, issued notice to appellants alleging violation of relevant sections of Sales Tax Act, 1990 and decided that; appellants would pay additional tax under S.34 of Sales Tax Act, 1990 since they had adjusted wrongly input tax against exempt supplies made by them; that appellants would pay sales tax on fixed assets as and when those were cleared whereas they would not pay sales tax on scrap since the tax thereon had already been paid by them ; that appellants having paid sales tax on advances received by them, the charge of non-payment of sales tax on advances received by appellants was not proved; that since deduction of input tax paid on mobile phones from output tax due from appellants was made in violation of S.7(1) of Sales Tax Act, 1990, appellants would deposit amount of Sales Tax so deducted along with additional tax; that deduction of input tax on electricity consumed in the Canteen, Dispensary, Guest House and Street lights being not admissible under S.8(1) of Sales Tax Act, 1990, appellants would deposit amount to be worked out by the Collectorate along with Additional Tax under S.34 of Sales Tax Act, 1990 till the time of depositing; and that the Adjudication Officer also imposed a personal penalty equal to 3% of total tax imposed on appellants under S.33(2) of Sales Tax Act, 1990---Validity---Held, so far as payment of additional Tax was concerned, appellants had paid amount of input tax so claimed much before issuance of show-cause notice to them without any reservation which had shown that it was due to inadvertence that they made adjustment of input tax against exempted supplies-Conduct of appellants had clearly shown no wilful evasion of tax, imposition of additional tax on appellants was not justified, therefore additional tax imposed on appellants, was remitted accordingly---Appellant had admitted that they had paid tax on scrap as confirmed by Adjudication Officer and demand of Sales Tax on fixed assents was not justified in view of judgment of High Court reported as 2002 PTD 976 and a host of decisions of various Benches of Appellate Tribunal---Department had furnished no evidence to show that a judgment contrary to said judgment of the High Court had been passed either by Supreme Court or any High Court---Order of adjudicating officer directing appellants to pay Sales Tax on fixed assets was' set aside, in circumstances---Appellants being registered person as manufacturer of cement which was liable to Central Excise Duty, their taxable activity was confined to manufacture of cement inside the factory---Extension of manufacture of cement outside the boundary walls of the factory to cover Sales Tax paid on telephone bills in other cities, was stretching scope of definition of "manufacture" too far to justify deduction of input tax paid on telephone bills against output tax due from appellants on manufacture of cement---Since said issue basically cropped up due to interpretation of provisions of law differently by both the sides, appellants were not liable to pay additional Tax and penalty--Electricity used within the compound of cement factory was used for taxable activity of manufacturing of cement---Sales Tax paid on electricity bills by the appellants was added to the value of areas identified by the department in which electricity was consumed---Deduction of input tax paid on electricity consumed in the areas , was admissible under law---Impugned decision of adjudicating officer on that count, was set aside---Appeal was partly accepted and impugned order- in-original passed by Adjudicating Officer was modified accordingly.

2001 PTD (Trib.) 2590; 2002 PTD 976; Messrs Olympia Industries v. A.C. Sales Tax 2002 PTC 776; D.G. Khan Cement Company Ltd. and others v. Federation of Pakistan and others 2004 SCMR 456 and 2002 PTD (Trib.) 300 ref.

Isaac Ali Qazi for Appellant.

Qurban Ali Khan, D.R. and Fazal Hameed, Sr. Auditor for Respondent.

Date of hearing: 21st May, 2005.

JUDGMENT

MUHAMMAD WALI KHAN MEMBER (TECHNICAL).---This order disposes of an appeal filed by Messrs Cherat Cement Company Ltd., Nowshera (hereinafter called the appellants) against the Order-in-Original No.26 of 2003, dated 10-7-2003 passed by the Collector of Customs, Sales Tax and Central Excise (Adjudication), Rawalpindi, Regional Office, Customs House, Peshawar (hereinafter called the adjudicating officer).

2. Brief facts of the case are that during the course of audit of records of the appellants the following discrepancies and observations were pointed out by the auditors of the Collectorate of Sales Tax, Peshawar:

(i) Inadmissible input tax adjustment against exempt supplies.

The appellants claimed input tax of Rs.563757.00 against exempt supplies made during March, 2001 to June, 2002. However, on pointation the appellants deposited the principal amount of sales tax but did not deposit additional tax amounting to Rs. 164003.00 calculated till then under section 34 of the Sales Tax Act, 1990.

(ii)Sales of fixed assets and scrap.

The appellants sold the following fixed assets and scrap during the audit period but did not pay sales tax thereon of Rs.17,35,200.00 (principal amount) and Rs.6,24,673.00 as additional tax under section 34.

(iii)Advances from Customers.

The annual accounts for the year, 2002 of the appellants showed they received advances from customers amounting to Rs.19,769,000.00 on which sales tax amounting to Rs.3,558,420.00 was not paid within due date. As such the said amount was recoverable along with Rs.1,281,031.00 as additional tax under section 34.

(iv) Inadmissible Input tax adjustment against mobile bills.

The appellants claimed input tax of Rs.24,563.00 on the mobile phone bills of offices situated at Peshawar, Islamabad and Karachi, which was not admissible. As such the said amount is recoverable along with additional tax Rs.7,860.00 under section 34 of Sales Tax Act, 1990.

(v)Inadmissible Input tax on electricity.

The appellants adjusted entire amount of electricity bills in respect of electricity consumed which was incorrect because the electricity consumed in guest houses, canteen, medical centre, street lights, main gate way and other miscellaneous places was not admissible due to its non-productive use and in this regard necessary clarification was sought from the Central Board of Revenue. The Sales Tax officers re-visited the factory premises and reviewed all necessary electricity connections and determined the non-productive use of electricity which constituted 2% of the total electricity bills. This involves sales tax of Rs.1,393,178.00 as principal amount and Rs.668,725.00 as additional tax under section 34 of the Sales Tax Act, 1990. Therefore, the unit was liable to deposit Rs.6,711,361 as principal liability of sales tax and Rs.2,746,292 as additional tax under section 34.

3. For the above mentioned irregularities noticed by the auditors it was alleged that the appellants had violated the provisions of sections 2(14), 2(44), 3(1), 6, 8(1), 36(1) read with sections 11(2), 33 and 34 of the Sales Tax Act, 1990 (hereinafter called the Act) and had deprived the Government of its legitimate revenue as indicated above.

4. Accordingly, a show-cause notice vide C. No. ST(Adj)C/06/ 2003/386, dated 17-4-2003 was issued to them by the adjudicating officer who, after hearing the parties, came to the following conclusions:

(1) The appellants shall pay additional tax under section 34 of the Act calculated up to the date of payment since they had adjusted wrongly input tax against exempt supplies made by them.

(2) The appellants shall pay sales tax on fixed assets as and when these are cleared whereas they shall not pay sales tax on scrap since the tax thereon has already been paid by the appellants.

(3) The appellants have paid sales tax on advances received by them. Therefore, the charge of non-payment of sales tax on advances received by the appellants is not proved.

(4) Deduction of input tax paid on mobile phones from the output tax due from the appellants was made in violation of section 7(1) of the Act. Therefore, the appellants shall deposit the amount of sales tax so deducted along with additional tax.

(5) Deduction of input tax on electricity consumed in the canteen, dispensary, guest house and street lights is not admissible under section 8(1) of the Act read with C.B.R.'s clarification C.No.1 (13)STR/2001, dated 10-12-2002. Therefore, the appellants shall deposit the amount to be worked out by the Collectorate along with additional tax under section 34 of the Act till the time of deposit.

(6) He also imposed a personal penalty equal to 3% of the total tax involved on the appellants under section 33(2) (cc) of the Act.

5. Aggrieved of the decision of the adjudicating officer the present appeal has been filed in this Tribunal.

6. The main points advanced in the memo of appeal and reiterated by the learned counsel for the appellants at the bar are given below:

(1) During the period from March, 2001 to September, 2002 the appellant made supplies to Messrs Agha Khan Rural Support Program which were exempt from sales tax. During that long period of 19 months in which those sporadic supplies were made, due to inadvertence and error, the appellants have not applied the apportionment of input tax adjustment Rule, 1996. However, as soon as the appellants realized the error, they paid the erroneously claimed input adjustment of Rs.563,757.00 against those exempted supplies vide Challan No. 9, dated 11-11-2002. In the instant case show-cause notice was issued on 17-4-2003 i.e. some 5 months after the payment had been made by the appellants. Hence, under the circumstances neither additional tax nor any penalty is attracted to the cause.

(2) Vehicles and fixed assets/fixture/furnitu^re by virtue of serial Nos.1 and 3 of S.R.O.578(I)/98 were excluded from the taxable activity to the registered person as their purchase has deeminglynot been construed as an input in taxable activity. Therefore, no output tax can be demanded on sale of ^vehicles/furniture/fixture. The sale of vehicle/furniture/ fixture is not liable to sales tax as has been held by the superior Courts in the following cases:

(i) Tribunals' judgment in appeal preferred by Messrs Novartis (Pakistan) Ltd., decided on 27-10-2000 vide Appeal K-193 of 2000, reported as 2001 PTD (Trib.) 2590 as confirmed by a Division Bench of Hon'ble Sindh High Court in STA. 62 of 2001 reported as 2002 PTD 976.

(ii) Judgment of the Hon^'ble Karachi Bench of the Tribunal in Appeal No.164 of 1999, as reproduced and relied upon by Lahore Bench in Appeal STA. 327/LV/2001, decided on 22-10-2001.

(iii) Judgment of the Lahore Bench of the Tribunal in STA.1259/2000.

(iv) Judgment of the Islamabad Bench of this Tribunal in Appeal No.1264 of 2001 decided on 14-12-2001.

(v)Judgment of the Hon'ble Lahore High Court in case reported as 2002 PTC 776 (Messrs Olympia Industries v. A.C. Sales Tax).

In all the decisions it has been held that the sale of such goods is neither ^"taxable supply" made by a manufacturer whose business is not the sale of such goods nor such sale was made in the course of ^"furtherance" of ^"taxable activity".

(vi) Demand of sales tax on realization of insurance claim against damage caused to fixed assets is also ultra vires and admittedly it has been settled by C.B.R. vide its letter, dated 18-10-2001 wherein the Board has clarified that amount recovered from insurance company against damage of fixed/operating assets is not sales taxable.

(3) Vide S.R.O. 617(I)/2000, dated 2-9-2000 issued in exercise of the powers conferred by the third proviso to subsection (1) of section 3 of the Central Excises Act, 1944 the Federal Government specified the excisable services, including telephone, on which central excise duty shall be levied and collected as if it were a tax payable under section 3 of the Sales Tax Act, 1990 and all the provisions of the said Act and the rules made and notifications, orders and instructions issued thereunder shall so far as may be with necessary modification apply. Accordingly, amendments were brought in sections 2(14)(d) and 2(20) of the Sales Tax Act, 1990 vide Finance Ordinance, 2001. By virtue of these amendments, central exercise duty collected on sales tax mode on the excisable services was made adjustable from the output tax. Telephones and mobile phones are used by the functionaries of the company in the appellants^' offices situated at Peshawar, Islamabad and Karachi for furtherance of appellants' business. As such the input tax paid on the telephone/mobile phone bills is adjustable from the output tax in case the telephone bills are issued in the name of the appellants.

(4) The appellants have been alleged to have claimed inadmissible input tax paid by them on the electricity consumed in guest house, canteen, dispensary, street lights and main gateway since consumption of electricity in these areas comes under "non-productive" activity. This allegation is frivolous and not sustainable. The appellants^' unit has no guest-house and all other usages which have been objected to, as a matter of fact, constitute direct inputs of the taxable activity carried out by the appellants. The electricity is consumed in:

(i)Plant Lights;

(ii)Stores;

(iii)Time office/Dispensary;

(iv)Canteen/mess;

(v)Dispatch Office;

(vi)Bachelor 'Hostel; and

(vii)Administrative offices.

The aforesaid list of premises/usage are integral part of the taxable activity and are legitimate constituent parts of the cost of sale. Thus, adjustment of input tax paid on electricity consumed in these areas cannot be denied. For instance canteen/mess is a mandatory requirement under Rule-3 of the West Pakistan Factories Canteen Rules, 1959. Therefore disallowing a fixed percentage of input tax on electricity bills of the company on the ground that the electricity was consumed in bachelor quarters, canteen, medical centre, street lights, main gate etc., is not justified since all the areas shown above are located on the same plot or premises of the registered person where the taxable production is carried out. Such places in the production premises, are needed to enhance the efficiency of production of taxable goods by providing locational proximity for production planning, production supervision, emergency handling of production problems, store keeping, security, accounting of taxable goods, providing first aid to the factory employees, making taxable supplies and issuing tax invoices and also for satisfying periodical regulatory requirements e.g., sales tax audit which are a part of the taxable activity within the meaning of section 2(35) of the Sales Tax Act, 1990. As such no restriction under section 8 of the Sales Tax Act, 1990 is notified. Similar case had already been decided in favour of Messrs Pioneer Cement Limited, Chenki District Khushab by the Customs, Central Excise and Sales Tax Appellate Tribunal's Special Bench, Camp Faisalabad vide judgment, dated 7-6-2002 in Appeal No. S.T.A. 807/LB of 2002. Without prejudice to the above, the liability demanded on this account is also inflated one as the respondents have calculated the alleged liability on the presumptive ratio of 2% of the total electricity monthly bills whereas on actual calculation that ratio comes to 0.60%.

(5) The show-cause notice is arbitrary and against the principles of natural justice as the appellants have been burdened with imaginary tax liabilities in spite of the fact that there is no short levy or non-levy of tax. Thus, the show-cause notice, per se, is ultra vires as under section 36 of the Act such notice can only be issued when either no tax is levied or tax is short levied.

(6) Without prejudice to the above, a case of legitimate error could not be equated with a wilful evasion specially when there is no motive involved for evasion of 'tax. Thus, under the circumstances of the case, no mens rea is attributed to the appellants in the show-cause notice. Therefore, they are not liable to any penal proceedings of Chapter-VII of the Sales Tax Act, 1990.

(7) Additional Tax and surcharge under section 34 of the Sales Tax Act, 1990 are not intractable liability of a taxpayer in as much as it all depends upon the attitude of the tax payer in suffering the default. If the default is not deliberate, intentional or contumacious additional tax and surcharge is not justified. In this regard attention is invited to a case-law reported as PLD 1991 SC 963.

(8)The show-cause notice is based on misconception of law and suffering from incurable legal infirmities. Thus, it is liable to be vacated.

On the basis of the above submissions it was prayed on behalf of the appellants that the impugned order may be set aside and show-cause notice may be vacated.

7. The learned DR, on the other hand, vehemently opposed the appeal and 'supported the impugned Order-in-Original passed by the adjudicating officer. He claimed that the audit observations on the basis of which the charges were framed against the appellants stand established in respect of input tax adjustment against exempt supplies, non payment of sales tax against fixed assets except scrap, adjustment of input tax paid on mobile phones even if used for private purposes and adjustment of electricity charges on electricity consumed outside the production area of the appellants. He claimed that the appellants deserve no leniency since they have intentionally indulged in irregularities that have caused huge loss to the exchequer in the form of sales tax. He therefore prayed that the appeal may be dismissed as it has no merits.

8. We have heard both the parties and examined record of the case carefully. We take up the issues involved in this appeal one by one. So far as the imposition of additional tax on the appellants for claiming input tax against exempt supplies is concerned, it is an admitted position that the appellants have paid the amount of input tax so claimed much before issuance of show-cause notice in the instant case without any reservation. This position has been confirmed by the adjudicating officer himself. The fact that the appellants paid the adjusted amount instantly on pointation without any reservation shows that it was due to inadvertence that they made adjustment of input tax against exempt supplies. Imposition of additional tax is a penalty for the cost of delay in payment of due tax or adjustment of input tax which is not due. Superior Courts have held that where there is no wilful evasion of the tax, imposition of additional tax or penalty is not justified. Reliance is on the judgment of the august Supreme Court of Pakistan in the case of D.G. Khan Cement Company Ltd. and others v. Federation of Pakistan and others reported as 2004 SCMR 456. The conduct of the appellants clearly shows that there was no wilful evasion of the tax. Therefore, imposition of additional tax is not justified. We accordingly remit the additional tax imposed on the appellants on this account.

9. So far as the direction of the adjudicating officer to the appellants to pay sales tax on fixed assets is concerned, the allegation against the appellants had two parts i.e., non-payment of sales tax on sale of fixed assets and scrap. The appellant have paid the tax on scrap as confirmed by the adjudicating officer in his impugned order. Regarding the demand of sales tax on the fixed assets, we feel that the same is not justified in view of the judgment of the Hon'ble Sindh High Court and a host of decisions of the various Benches of this Tribunal relied upon by the appellants which hold the ground. The respondents have furnished no evidence to show that a judgment contrary to the judgmen^t of the Hon'ble Sindh High Court has been passed either by the august Supreme Court of Pakistan or any of the High Courts. The department has reportedly filed appeal in the Hon'ble Supreme Court of Pakistan against the judgment of the Hon'ble Sindh High Court but reportedly no stay has been granted by the august Court meaning thereby that the judgment of the Hon'ble Sindh High Court is operative and binding on us. Therefore, demand of sales tax on sale of fixed assets is not justified. The order of the adjudicating officer directing the appellants to pay sales tax on fixed assets is therefore set aside.

10. As regards adjustment of input tax paid on mobile phones, we are of the view that the appellants are registered person as manufacturer (of cement). Cement is liable to central exercise duty under section 3 of the Central Excises Act, 1944. Under the third proviso to subsection (1) of section 3 of the Act, the Federal Government through S.R.O. 617(I)/2000, dated 2-9-2000 specified certain goods and services including telephone services on which central excise duty was to be levied and collected as if it was a tax payable under section 3 of the Sales Tax Act, 1990. Vide amendments made in sections 2(14)(d) and 2(20) of this Act the excise duty on these specified items was treated as input and output tax respectively for the purposes of adjustment of input tax and payment of output tax under the Sales Tax Act, 1990. The appellants claim that central excise duty paid as sales tax on the bills of mobile phones used in the offices of the appellants in Peshawar, Islamabad and Karachi is in fact, input tax paid by them in furtherance of business and its deduction from the output tax paid or payable on cement manufactured by them in the factory located in Cherat is admissible since the mobile phones are in the name of the registered person (the appellants). We are of the view that central 'excise duty and sales tax are charged, levied and collected on the cement manufactured and cleared from the factory. The scope of manufacture of cement cannot be taken beyond the factory compound where cement is manufactured. The appellants are registered as manufacturer of cement. As such their taxable activity is confined to manufacture of cement inside the boundary walls of cement factory. Extension of manufacture of cement outside the boundary walls of the factory to cover sales tax paid on telephone bills in Peshawar, Islamabad and Karachi is stretching the scope of the definition of ^"manufacture" too far to justify the deduction of input tax paid on telephone bills against output tax due from the appellants on the manufacture of cement. In this view of the matter we gain support from the judgment, dated 7-6-2002 of this Tribunal's Special Bench in Appeal No. S.T.A. 807/LB of 2002 of Messrs Pioneer Cement Limited Khushab v. Collector of Sales Tax, Faisalabad and Collector (Adjudication), Faisalabad in which adjustment of input tax paid on electricity consumed in the administrative office was allowed, if such office was located inside the factory premises. The emphasis in the said judgment was of the word "if" which clearly shows that if the office is found not located inside the factory compound, input tax adjustment will not be allowed. We also hold the same view because the telephone/mobile telephone charges on which input tax was paid relate to town/city offices located in Peshawar, Islamabad and Karachi which are not located in the registered premises of the appellants. As such these offices have nothing to do with the planning, producing and storing of manufactured cement. The appellants are therefore directed to pay the amount of tax deducted as input tax paid on telephone/mobile telephone bills from the output tax paid by them on the cement manufactured by them. However, since the issue basically cropped up due to interpretation of the provision of law differently by both the parties, the appellants are not liable to pay additional tax and penalty as held by the Lahore Bench of the Tribunal in the case reported as 2002 PTD (Trib.) 300 and duly approved by the august Supreme Court of Pakistan in the case of D.G. Khan Cement Company Ltd. and others v. Federation of Pakistan and others (2004 SCMR 456).

11. Coming to the last issue, we are of the view that the electricity used within the compound of the cement factory is used for the taxable activity of manufacturing of cement. The sales tax paid on electricity bills by the appellants adds to the value as the areas identified .by the respondents in which the electricity is consumed i.e. plant lights, stores, time office, dispensary, canteen/mess, guest house (bachelor hostel) and administrative office are all located within the compound' of the factory and are directly related to taxable activity within the meaning of section 2(35) of the Act in that the areas where the electricity is consumed are needed to enhance the efficiency of production of taxable goods by providing locational proximity for production planning, production supervision, emergency handling of production problems, store keeping, security, accounting of taxable goods, providing first aid to the factory employees, making taxable supplies and issuing tax invoices and also for satisfying periodical regulatory requirements like sales tax audit. As such the deduction of input tax paid on the electricity consumed in the areas shown in para 6(4) above is admissible under the law as held by the Tribunal's Special Bench in the case of Messrs Pioneer Cement Ltd. Khushab as cited above. We also gain support from another decision of this Bench in appeal No.783/PB/2002 of Messrs Premier Sugar Mills, Mardan in which adjustment of input tax paid on electricity consumed in labour colony and houses of personnel of the factory located inside the factory premises was allowed since salary and perks of labour were treated as part of cost of production, a taxable activity. The learned D.R. could not cite any decision of the superior Courts or of the Tribunal that is contrary to the findings of the aforesaid decisions of the Tribunal. Accordingly, we set aside the decision of the adjudicating officer on this count.

12. In view of what has been discussed above, the appeal partially succeeds. The impugned Order-in-Original passed by the adjudicating officer is therefore modified to the above extent and the appeal is disposed of accordingly.

13. Announced.

14. Parties may be informed.

H.B.T./462/Tax (Trib.)Order accordingly.