Messrs GENERAL TYRE AND RUBBER CO. PAKISTAN LTD. VS DEPUTY COLLECTOR COLLECTORATE OF CUSTOMS, CENTRAL EXCISE AND SALES TAX, KARACHI
2006 P T D 1137
[Karachi High Court]
Before Anwar Zaheer Jamali and Mrs. Yasmeen Abbasi, JJ
Messrs GENERAL TYRE AND RUBBER CO. PAKISTAN LTD. through Managing Director, Karachi
Versus
DEPUTY COLLECTOR COLLECTORATE OF CUSTOMS, CENTRAL EXCISE AND SALES TAX, KARACHI
Special Sales Tax Appeal No. 38 of 2004, decided on 27/01/2006.
(a) Sales Tax Act (VII of 1990)---
----Ss. 2(33) & 3---Term "supply" as defined in S.2(33) of Sales Tax Act, 1990---Essential ingredient---Transaction must be "in furtherance of business", otherwise same would not be called as "supply" and could not form part of taxable supply to create a charge under S.3 of Sales Tax Act, 1990.
(b) Sales Tax Act (VII of 1990)---
----Ss. 2(16)(33), 3 & 7---Sales Tax General Order No.1 of 1998, dated 17-6-1998---Input tax claim---Process of mixing raw material with other material carried out by assessee on machinery of vendor on fixed processing charges---Assessee seeking. input tax adjustment for payment made to vendor as processing charges---Validity---Raw material was supplied by assessee to vendor and after its process, same was returned back to assessee---Element of inclusion of sales tax was, thus, not appearing during whole transaction as processing activity was carried out by vendor on fixed processing charges with no factors of sale, lease or other disposition of goods as embodied in S.2(33) of' Sales Tax Act, 1990 or explained in Sales Tax General Order No. 1/98---None of the clauses of Sales Tax General Order No.1/98 authorised assessee to claim input tax adjustment just on processing activity carried out by him on machines and through labourers of vendor---Holding of a tax invoice was a condition precedent by virtue of S.7 of Sales Tax Act, 1990 for input tax claim on taxable supplies---Non-placing on record such tax invoice by assessee was sufficient proof of the fact that return of processed goods was not in terms of' supply by vendor to vendee, because no tax-paid material of vendor himself was used in processing activity, creating a charge of sales tax on processed goods---In absence of sales tax invoice, when there was no transfer of sales tax charges from vendor to assessee, input tax claimed by assessee was not warranted under law.
(c) Sales Tax Act (VII of 1990)---
----S.7---Input tax claim---Tax invoice, holding of---Condition precedent for input tax claim on taxable supplies.
Aminullah Siddiqui for Appellant.
Raja Muhammad Iqbal for Respondents.
ORDER
MRS. YASMIN ABBASEY, J.---This appeal has been directed against the order of Customs Excise and Sales Tax Appellate Tribunal Bench No.1, Karachi dated 31-1-2004.
On the controversial point that whether charge of Vendor from appellant on the process of mixing got carried out by them on the machinery of Vendor with the assistance of their labour comes within the definition of conversion or not and appellant was justified in claiming input tax thereof, following question of law was proposed for consideration:
"Whether the appellant in keeping with provision of Sale Tax General Order No.1 of 1998 dated 17-6-1998 is entitled to adjust as input tax, the amount of sale tax charged by the vendor on the processing charges?"
Factual aspect of the case leading to this proposition are that according to the appellant on 9-5-1998 his factory caught fire and machinery was damaged, therefore he had no option but to get his Master Rubber Batches, raw material mixed with other material in compound, processed from other unit's equipment having such mixing plants on charges as settled. For the purpose as aforesaid, he contacted with different companies and finally vide letter dated 29-6-1999 a settlement was entered into with Messrs Diamond Rubber Mill that they will charge at Rs.3.80 per kg as processing charge inclusive of all processing over head etc.
According to the appellant thereafter when an adjustment of input tax was claimed by him for the payment made to vendor as processing charges, a show-cause notice dated 28-3-2001 was issued that the payment made for hiring machinery and to the supervisory staff is not covered under the definition of' supply in section 2(33) of the Sales Tax Act (hereinafter will be referred as Act) therefore appellant is not entitled to claim input tax.
It is pleaded by the learned counsel for the appellant that processing activity carried out by appellant falls within the definition of supply defined in section 2(33) of the Act and particularly under clause of "other disposition of goods" which is one of the elements of term supply. Therefore, appellant is entitled to claim input tax on the processing charges claimed by the Vendor. It is further contended that the processing act done by Messrs Diamond Rubber Mill on behalf of the appellant was an act of manufacturing in terms of-section 2 clause (16) of the Act which includes any process in which an article singly or in combination with other articles, materials, components is either converted into another distinct article or products or is so changed, transformed or reshaped that becomes capable of being put to use differently. Thus the activity carried out by the appellant through Messrs Diamond Rubber Mill was a manufacturing process covered under the definition of supply, entitling appellant to claim input tax adjustment.
According to the learned counsel for appellant their case is covered under the term used in the definition of supply as "other disposition of goods" as explained in Sales Tax General Order No.1/98 dated 17-6-1998, clause 3 of Sales Tax General Order says that:
"The most important question now is the value on which such vendor shall charge and pay the tax. According to the definition laid down in section 2 (46) of the Act, "Value" is the consideration in money against which the registered person supplies the goods. Therefore, a vendor is required to charge sale tax on the consideration/charges of conversion. If during this "disposition of goods", he has used tax paid raw material procured by the vendor himself, tax credit of the same shall be available to the vendor."
These grounds of the appellant have been rebutted by the learned counsel for the respondent that the act of processing got done by the appellant through the mixing machinery and skilled labour of Messrs Diamond Rubber Mill was not a taxable supply, because that processing or manufacturing was not the activity carried out by Messrs Diamond Rubber Mill on their own sales tax paid raw material, but only machinery and supervisory staff of Messrs Diamond Rubber Mill was used by the appellant on hire basis. Thus the return of appellant's material in the finished form by Messrs Diamond Rubber Mill cannot come within the ambit of supply as defined in the Act.
For the proper appreciation of the case and the question proposed in the matter it will be beneficial to reproduce the term supply as defined in the Act which reads as under:
"Section 2(33); "supply" includes sale, lease (excluding financial (or operating) lease) or other disposition of goods carried out for consideration and also includes-
(a) putting to private business or non-business use of goods acquired, produced or manufactured in the course of business;
(b) auction or disposal of goods to satisfy a debt owed by a person;
(c) possession of taxable goods held immediately before a person cease to be a registered person.
Provided that the Federal Government, may by notification in the official Gazette, specify such other transactions which shall or shall not constitute supply;"
The above provision makes it clear that the main ingredient of the term supply is that the transaction must be "in furtherance of business" and if this element is missing then it will not be called as supply and cannot be form part of taxable supply to create a charge under section 3 of the Act which speaks that;
"Section 3: Scope of tax: (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of (fifteen) per cent of the value of---
(a) taxable supplied made by a registered person in the course or furtherance of any (taxable activity) carried cm by him and
(b) goods imported into Pakistan.
(2) Notwithstanding the provisions of subsection (1)
(a) taxable supplies specified the Third Schedule shall be charged to tax at the rate of fifteen per cent of the retail price which along with the amount of sales tax shall be legibly, prominently and indelibly printed or embossed by the manufacturer on each article, packet, container, package, cover or label, as the case may be; and
(b) the Federal Government may, subject to such conditions and restrictions as it may impose, by notification in the official Gazette, declare that in respect of any goods or class of goods imported into or produced or any taxable supplies made by a registered person or a class of registered persons, the tax shall be charged, collected and paid in such manner and at such higher or lower rate or rates as may be specified in the said notification; and
(3) The liability to pay the tax shall be,--
(a) in the case of supply of goods of the person making the supply, and
(b) in the case of goods imported into Pakistan, of the person importing the goods.
(3A) Notwithstanding anything contained in clause (a) of subsec?tion (3), the Federal Government may, by a notification in the official Gazette, specify the goods in respect of which the liability to pay tax shall be of the person receiving the supply.
???????????
(4) ?????? ?????????.
???????????
(5) ?????? ?????????.
(6) ?????? ?????????.
From the above it is clear that much emphasis has been given by the legislature for levy of sale tax on the taxable supplies made in the B course of furtherance of any taxable activity. Whereas in the present case the undisputed fact is that raw material was supplied by appellant to Diamond Rubber Mill and after its processing, it was returned back to him. Thus, element of inclusion of sale tax is not appearing during this whole transaction, as processing activity was carried out by Diamond Rubber Mill on the fixed processing charges as settled vide letter dated 29-6-1999 with no factors of sale, lease or other disposition of goods, as embodied in section 2(33) of Act or explained in Sales Tax General Order 1/98. Therefore levy of sale tax under section 3 of Act, entitling a registered person to deduct input tax from the output tax, is not available to appellant.
Sales Tax General Order 1/98 with reference to the definition of supply as defined in section 2(33) of Act further clarifies that a person carrying on the process as explained in section 2(16) is a manufacturer. Therefore Vendor by very nature of their job are manufacturer and the supply carried out by such vendor is covered by word other disposition of goods and is chargeable to Sales Tax. But the very clauses (ii) and (iii) of Sales Tax General Order 1/98 imposes two conditions to avail the benefit of input claim that:
(1) Supply including other disposition of goods would be in the course of furtherance of his business.
(2) During this disposition of goods he has used tax paid raw material procured by the vendor himself.
Even otherwise clause (iii) of Sale Tax General Order 1/98 reproduced above further clarifies that even if at any stage it is found that entitlement of input tax adjustment is appearing in matter then also it will go to the vendor, subject to the condition as embodied therein. None of the clause pf Sale Tax General Order 1/98 authorises the vendee to claim input tax adjustment just on the processing activity carried out by him on the machines and through the Labours of vendor.
Apart from it, holding of a tax invoice is also a condition precedent, by virtue of section 7 of the Act for input tax claim on taxable supplies. So even if the case as pleaded by learned counsel for appellant is taken as granted then also the observation of learned tribunal that such tax invoice has also not been placed on record is sufficient proof of the E fact that as the return of processed goods was not in terms of supply by the vendor to the vendee, because no tax paid material of vendor himself was used in the processing activity, creating a charge of Sales Tax on the processed goods. Therefore, also in absence of sales tax invoice when there was no transfer of Sales Tax Charges from vendor to the vendee, input tax claimed by appellant is not warranted under law.
In view of forgoing reasons we find no substance in the appeal and same is hereby dismissed.
S.A.K./G-5/K????????????????????????????????????????????????????????????????????????????????????? Appeal dismissed.