GHANDHARA NISSAN DIESEL LTD., through Sr. General Manager Finance, Karachi VS COLLECTOR, LARGE TAX PAYERS UNIT, GOVERNMENT OF PAKISTAN, KARACHI and 2 others, 2006 PTD-KARACHI-HIGH-COURT-SINDH 2066 (2004)

(a) Interpretation of statutes---

---Words used in a statute---Interpretation---Until and unless any contrary 'intention can be inferred expressly or impliedly, such words would be given their plain meaning in the ordinary course.

(b) Sales Tax Act (VII of 1990)

---Ss. 7 (1) & 8(1)(b)---S.R.O. 1307(I)/97, dated 20-12-1997---Claim for deduction of input tax paid on electric panels and transformers---Denial of such claim on basis of S.R.O., 1307(I)/97 for not having used such goods solely in producing taxable supplies---Validity---Provision of S.8(1)(b) of Act, 1990 is merely clarificatory to provision of S.7(1) thereof and not creating any new class of goods disentitling registered person from claiming or deducting input tax---Provision of S.8(1)(b) of Sales Tax Act, 1990 is in the nature of exception to general rule contained in S.7(1) thereof---Deduction of input tax permissible, if paid on goods being used for producing taxable supplies, but not, if paid on goods, which being either direct constituent and integral part of taxable supplies or used for a purpose other than taxable supplies---Entitlement of registered person to deduction of input tax, if available, would cease in respect of goods specified by Federal Government in notification---Federal Government in exercise of its power under S.8(1)(b) of Sales Tax Act, 1990 could exclude specific goods from admissibility of input tax, but could not create a new class of goods in general terms thereby excluding the whole class of goods from claim of input tax---Provision of S.R.O. 1307(I)/97 was in conflict with provision of Ss. 7(1) & 8(1)(b) of the Sales Tax Act, 1990 for having restricted wider connotation emanating from use of word "purpose" employed by legislature in S.7(1) thereof---Due to such conflict, provisions of Ss. 7(1) & 8(1)(b) of the Act, would prevail over S.R.O. 1307(I)/97---Such panels and transformers for not finding mention in S.R.O. 1307(I)/97 would not be excluded from entitlement of deduction of input tax---Such claim was allowed in circumstances ---Principles.

Central Board of Revenue v. Sheikh Spinning Mills Limited, Lahore 1999 SCMR- 1442 rel.

(c) Words and phrases---

---"Purpose"---Meaning.

Chamber's 20th Century Dictionary, 1983 Edition ref.

(d) Words and phrases---

---"Specific" & "General"---Meaning and distinction.

Chamber's Dictionary ref.

(e) Interpretation of statutes---

----Exception to general rule in a statute---Scope---Provision of law in the nature of exception shall not override substantive provisions, but shall operate merely to the extent of making exceptions to the general rule.

(f) Interpretation of statutes---

----Subordinate legislation=--Scope---Subordinate legislation could not expand or restrict substantive provisions contained in the Act---Any such attempt would be termed as conflicting to substantive provision and would, to such extent, have to give way to substantive provisions in the Act.

Aziz A. Shaikh for Appellant.

Raja Muhammad Iqbal and S. Mehmood Alam Rizvi, Standing Counsel for Respondents.

Date of hearing: 22nd January, 2004.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---This appeal is directed against the order dated 20-5-2002, passed by the learned Customs, Excise and Sales Tax Appellate Tribunal, Karachi-III, in Sales Tax Appeal No. 11 of 2000. The questions of law requiring consideration are as under:----

1. Whether S.R.O. 1307(I)/97 dated 20-12-1997 was in conflict with the provisions contained in sections 7(1) and 8(1)(b) of the Sales Tax Act, 1990?

2. If the answer to Question No. 1, is in affirmative whether the statutory provisions contained in sections 7(1) & 8(1)(b) of the Sales Tax Act, 1990, shall prevail over S.R.O. No. 1307(1)/97 Whether the Customs, Excise & Sales Tax Appellate Tribunal, has misdirected in up-holding the recovery of input tax claim imposition of additional tax under sections 34/36 penalty under section 33 of the Sales Tax Act, 1990?

The relevant facts are that the appellant is assembler of Nissan Diesel Trucks in Pakistan and registered person under the Sales Tax Act, 1990, engaged in making taxable supplies. An audit for the years 1996-97 and 1997-98 was conducted by duly appointed chartered accounting firm and as a result thereof, the Additional Collector, Collectorate of Sales Tax and Central Excise (East) Karachi, issued a show-cause-notice calling upon the appellant to explain inter alia, as to why an amount of Rs.1,47,639 claimed by way of in put tax credit adjustment on plant and machinery in February, 1998 may not be recovered back as inadmissible and additional tax at Rs.352,319 may not be recovered.

The appellant replied that the input tax at Rs.1,47,639 was rightly claimed as the purchase was made for K.E.S.C. private Panels and Transformers not specified in S.R.O. 1307(I)/97 dated 20-12-1997 and for the same reason no additional tax could be imposed.

The explanation was not found says factory and the matter was referred to Additional Collector (Adjudication), Karachi-III, the respondent No. 2. After hearing the parties, the respondent No.2, held that under S.R.O. 1307(I)/97, a registered person shall not be entitled to re-claim or deduct the input tax paid on goods which are not direct constituent and integral part of the taxable goods produced and there is no doubt that electric panels and transformers are not direct constituent and integral part of the taxable goods and therefore, input tax of Rs.1,47,639 claimed and adjusted by the appellant was contrary to S.R.O. 1307(I)/97. He therefore, ordered for payment of Sales Tax of Rs.1,47,639 and additional tax of Rs.3,52,319 and further imposed penalty of Rs.7,382 under section 33 of the Sales Tax Act, 1990.

The appellant preferred first appeal, before the Customs, Excise and Sales Tax Appellate Tribunal, Karachi Bench (hereinafter referred to as the Tribunal), contending that the input tax claimed by the appellant till 19-12-1997, i.e. before the issuance of S.R.O. 1307(I)/97 was allowed under S.R.O. 556(I)/96 dated 1-7-1996 excluding the items specified therein. It was further contended that S.R.O.1307(I)/97 issued in exercise of the power conferred under section 8(1)(b) is ultra vires the provisions of statute, as in this notification the goods on which registered person shall not be entitled to deduct input tax are not specified. The S.R.O. is in general terms saying that, "a registered person shall not be entitled to reclaim or deduct the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced", without specifying the goods as envisaged under section 8(1)(b) of the Sales Tax Act, 1990. It was urged that in S.R.O. 1307(I)/97, the electrical panels and transformers were not specified for the purpose of exclusion/non-admissibility of input tax and therefore, the above S.R.O. could not be applied for exclusion of the input tax. It was stated that the above S.R.O. was struck down by the Lahore High Court. However, the Hon'ble Supreme Court set aside the judgment of Lahore High Court with the observations that as and when the department denies the reclaim of deduction of input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied, the assessee would be at liberty to agitate the controversy before the forums provided under the Sales Tax Act, with reference to the substantive provisions of the Act and if any conflict was found in the S.R.O. No 1307(I)/97 and Sales Tax Act, the substantive provisions of the Act will prevail.

The learned Tribunal after observing in para.4 of the impugned order that a plea was raised to the effect that S.R.O. 1307(I)/97, issued in exercise of the powers conferred under section 8(1)(b) of the Sales Tax Act, was ultra vires the statutory provisions, failed to give any finding on this issue. Thus, the issue raised by the appellant before the Tribunal was in fact decided against the appellant very conveniently by omission to consider the contention. The provisions contained in section 8(1)(b) were not considered at all and the issue was decided in a very slipshod and perfunctionary manner with the following findings:---

"5. We have gone through the case records and submissions of both the sides. The adjustment has been claimed by the appellant under section 7 of the Sales Tax Act, 1990 which provides that:---

DETERMINATION OF TAX LIABILITY

1. For the purpose of determining his tax liability in respect of taxable supplies made during a tax period, registered person shall [subject to provisions of section 73,] 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);

(iii)

(iv) ***.]

6. The transformers and panels imported are for multiple uses and can be utilized any where so they cannot be termed as input for manufacture. Moreover, these items are not solely used in manufacturing of taxable supply.

7. In view of above discussion we found that the present appeal is not based on merits hence it is dismissed.

We have heard Mr. Aziz A. Shaikh, learned counsel for the appellant, Mr. Raja Muhammad Iqbal, Advocate for the respondents and Mr. S. Mehmood Alam Rizvi, Standing Counsel, who was present on Court Notice.

The learned counsel for the appellant has reiterated the contentions reproduced above and has vehemently argued that under section 8(1)(b), the Federal Government is empowered to issue a notification specifying the goods in respect of which a registered person shall not be entitled to re-claim or deduct input tax, but is not empowered to issue the notification in general terms. He has submitted that the Federal Government has been issuing notifications under section 8(1)(b) of the Sales Tax Act, before and after the issuance of S.R.O. 1307(I)/97 and a comparison of this notification with the earlier and subsequent notifications shows that except the notification S.R.O. 1307(1)/97 in all other notification, the goods were specified in respect whereof a registered person shall not be entitled to re-claim or deduct input tax. He has submitted that it is indicative of the fact that the S.R.O. 1307(I)/97 is not in consonance with the mandate conferred on the Federal Government by the Legislature under section 8(1)(b) of the Sales Tax Act, 1990 and is in clear conflict with the substantive statutory provision and thus, the notification is ultra vires. He has submitted that the Hon'ble Supreme Court in the case of Central Board of Revenue v. Sheikh Spinning Mills Limited, Lahore 1999 SCMR 1442, while allowing the appeals against the judgment of Lahore High Court, has clearly observed that, the forum provided in the Sales Tax Act, shall decide the controversy pertaining to the claim of input tax with reference to substantive provisions of the Act and S.R.O. and in case of any conflict between the two, the substantive provisions of the Act would prevail. The learned counsel has vehemently argued that the learned Tribunal has misdirected in not deciding the issue in accordance with the guidelines given by the Hon'ble Supreme Court and has failed to apply its mind to the conflict between the substantive provisions of the Act and S.R.O. apparent on the face of it. He has submitted that the questions for consideration may be decided in favour of the appellant.

On the other hand, Mr. Raja M. Iqbal, has supported the impugned findings of the Tribunal. He has contended that no question of law arises out of the order of Tribunal and in fact the issue pertains to factual controversy. He submitted that the electrical panels and transformers are not direct constituent and integral part of the taxable goods and, therefore, the Tribunal has rightly held that the appellant was not entitled to claim input tax paid on electrical panels and transformers.

The learned Standing Counsel, has not supported the view taken by the learned Tribunal. He has submitted that subordinate legislation like the S.R.O. 1307(I)/97 issued in exercise of the powers conferred under section 8(l)(b) of the Sales Tax Act, has to be in strict conformity with the statutory provision delegating the power for subordinate legislation and any subordinate legislation beyond the power conferred under statutory provisions is liable to be struck down as ultra vires. He has further submitted that a registered person shall be entitled to deduct input tax 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. The word "purpose" is of wider import and envisages payment of input tax on any goods; which are required for the purpose of taxable supplies. He has maintained that the S.R.O. 1307(I)/97 purported to curtail the concession available in section 7 of the Sales Tax Act, in general terms and thus, is in clear conflict with the substantive provisions. The substantive provisions in the statute have to prevail over the notification as held by the Hon'ble Supreme Court in the case of Sheikh Spinning Mills Limited. (Supra). He has supported the contention of Mr. Aziz A. Shaikh, learned counsel for the appellant that the Federal Government is empowered to specify the goods which shall be excluded from the deduction or input tax otherwise entitling the registered person to re-claim or deduct the input tax paid. Since the goods are not specified in S.R.O. 1307(I)/97 therefore, the concession cannot be denied to the appellant.

We have carefully considered the contentions raised by the learned Advocates for the parties. Before adverting to the contentions raised by the learned Advocate, it would be appropriate to reproduce the relevant provisions of the law as they stood in December, 1997 and the notifications. For proper appreciation of the contentions raised:---

"The Sales Tax Act, 1990:

Section 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 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 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):

(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 supplies made or to be made by him;

(b) any other goods which the Federal Government may, by a notification in the official Gazette, specify;"

"Notification No. S.R.O.556(I)/96, dated 1st July, 1996. "In exercise of the powers conferred by clause (b) of subsection (1) of section 8 of the Sales Tax Act, 1990, the Federal Government is pleasedto? specify the goods detailed in column (2) of the table below, on which a registered person shall not be entitled to claim input tax credit it such goods are purchased by him for use in registered office or the business premises."

???????????

1. Vehicles.????????????????????????????????????????? Respective headings of Chapter 87.

2. Consumer durables of the House?????? Respective headings

hold type such as air conditioners

(window type or split). Refrigera?-

tors, microwave ovens, deep-

freezers and other household appliances.

"Notification No. S.R.O. 1307(I)/97, dated 20th December, 1997. In exercise of the powers conferred by clause(b) of subsection(l) of section 8 of the Sales Tax Act, 1996, and in suppression of it Notification No. S.R.O. 556(I)/96, dated the 1st July, 1996, the Federal Government is pleased to direct that a registered person shall not be entitled to reclaim or deduct the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied, during the course, or in furtherance, of any taxable activity."

"Notification No. S.R.O. 578(I)/98, dated 12th June, 1998.---In exercise of the???? powers conferred by clause (b) of subsection (1) of section 8 of the Sales Tax Act, 1990, and in suppression of Ministry of Finance and Economic Affairs Notification No S.R.O. 1307(1)/97, dated the 20th December, 1997, the Federal? Government is pleased to specify that the following goods acquired otherwise than a 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 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, garments, fabrics, etcetera and consumption on entertainments.

(10) Gifts and give aways.

In view of the observations made by the Hon'ble Supreme Court in the case of Sheikh Spinning Mills (Supra), that, "as and when the department denies deduction of input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied, the assessee would be at. liberty to agitate the controversy and the issue shall be considered with reference to the substantive provisions of the Act and if any conflict was found in the S.R.O. and Sales Tax Act, the substantive provisions of the Act, will prevail", we need not to dilate the 'provisions governing the subordinate legislation. We shall examine if there is any conflict in the substantive provisions of the Sales Tax Act, contained in sections 7 and 8 thereof and S.R.O. 1307(I)/97 under which the claim of adjustment of input tax has been denied to the appellant.

A perusal of section 7 of the Sales Tax Act, shows that (sic) deduct input tax paid 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. The golden principle of interpretation of statutes is that, until and unless any contrary intention can be inferred expressly or impliedly the words used in a statute are to be given their plain meaning in the ordinary course. Thus, the words used by the legislation, "a person shall be entitled to deduct input tax paid for the purpose of taxable supplies made, or to be made by him from the output tax" should be taken in their ordinary plain meaning. In the Chamber's 20th Century Dictionary, 1983 Edition, the word "purpose has been given meaning as follows: -

"Idea or aim kept before the mind as the end of effort: power of seeking the end desire: act or fact of purposing: an end desired: a definite intention, purport"

If the word purpose is considered in ordinary plain meaning, it would appear that the intention of legislature, apparent from the language is that if any input tax is paid with the intention that the goods on which such input tax is paid shall be used in the end products or taxable supplies made or to be made, then the registered person shall be entitled to deduct the same from the output tax. It is nowhere provided that deduction of input tax on such goods only, shall be allowed which are the direct constituent and integral part of taxable goods produced, manufactured or supplied. Now, we come to the provisions contained in section 8 of the Sales Tax Act, which starts with the non obstante clause, meaning thereby, that even. if registered person is entitled for deduction of input tax, he shall loose entitlement if the goods on which the input tax has been paid, are excluded under the substantive provisions of section 8 or under the notification issued by the Federal Government, in conformity with the provisions in section 8 of the Sales Tax Act. In other words, the effect of reading the sections 7 and 8 of the Sales Tax Act; together is that a registered person shall be entitled to deduct input tax paid 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 or that tax period but subject to the provisions contained in section 8 because of overriding provisions contained therein. On reading of the sections 7 and 8, the following position emerges:---

1. A registered person shall be entitled to deduct input tax paid 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.

2. The registered person shall not be entitled to re-claim or 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.

3. A registered person otherwise entitled to re-claim or deduct input tax paid for the purpose of taxable supplies made or to be made by him from the output tax, shall not be entitled in respect of any goods, which the Federal Government may by a notification in the official Gazette specify.

Before proceeding further, we will pause here for a moment to examine the meaning of expression "specify". According to Chamber's Dictionary, it means, to mention particularly: to make specific: to set down as requisite, precise. It can be read in juxtaposition to the word "general" which means relating to a genus or whole class: including various species: not special: not restricted or specialized: relating to the whole or to all or most.

In the realm of tax laws exemptions, concessions or exceptions are provided in the statutes either in respect of assessees, class of assessees, goods or class of goods. From reading of the provisions contained in sections 7 and 8 of the Sales Tax Act, we find that, under section 7 a formula has been described by the legislature for determination of the tax liability under which a sales of goods have been specified. This clause comprises the goods on which input tax has been paid by a registered person which is acquired for the purpose of being used for producing the taxable supplies. In corollary to the above provisions it is provided in section 8(1)(a) that a registered person shall not be entitled to the claim or 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. Thus, this provision is in fact in the nature of further clarification and for removing the ambiguity. It is clarificatory to the provisions contained in section 7(1). It does not create any new class of goods. disentitling a registered person from claiming or deducting input tax. The provision contained in section 8(1)(b) is in the nature of exception to the general rule contained in section 7 read with section 8(1)(b) and section 10. Under this provision, the Federal Government has been delegated the power to specify the goods which otherwise qualify for input tax, thereby excluding them from the admissibility of input tax. However, it does not empower the Federal Government to create a new class of goods in general terms thereby excluding the whole class of such goods from the claim of input tax. The provisions of law which are in the nature of exception shall not override the substantive provisions but shall merely operate to the extent of making exceptions to the general rule. Now, if we examine theprovisions contained in S.R.O. 1307(I)/97, we find that the Federal Government, had disentitled registered person from re-claiming or deducting the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied during the course or in the furtherance of any taxable activity. There is apparent conflict between this S.R.O. and the provisions contained in section 7(1) of the Sales Tax Act, which entitles a registered person to deduct input tax paid for the purpose of taxable supplies made or to be made. The substantive provision in section 7 does not contain that only such input tax shall be re-claimed or deducted which is paid on the goods which are direct constituent and integral part of the taxable goods produced, manufactured or supplied. It has the effect of restricting the wider connotation emanating from the use of word "purpose" employed by the legislature in section 7 of the Sales Tax Act. No subordinate legislation can expand or restrict the substantive provisions contained in the Act. Any attempt in this behalf shall be termed as conflicting to the substantive provision and shall to that extent have to give way to the substantive provision contained in the Act as held by the Hon'ble Supreme Court in the case of Sheikh Spinning Mills (Supra).

We further find that the legislature has itself given entitlement to a class of goods in respect whereof input tax can be reclaimed or deducted and has further specified a class of goods, the payment of tax whereon, shall not be allowed to be reclaimed or deducted from the output tax. The legislature has not empowered the Federal Government to create any other class of goods in general terms excluding the same from the purview of reclaim or deduction of input tax. It has merely empowered the Federal Government to specify, meaning thereby, to mention particularly or determine the specific goods which otherwise entitle the registered person for re-claiming or deducting input tax, to exclude from such concession. Thus, creation of new class of goods in general terms disentitling the registered person from re-claiming or deducting input tax paid on such goods is not in consonance with the substantive provision contained in section 8(1)(b) of the Sales Tax Act. It is manifestly beyond the authority, delegated to the Federal Government by the legislature. A perusal of the S.R.O 556(I)/96 dated 1-7-1996 which was superseded by S.R.O. 1307(I)/97 and Notification No. S.R.O. 578(I)/98 dated 12-6-1998 which superseded Notification No. S.R.O. 1307(I)/97 shows, that the Federal Government specified goods in respect of which a registered person was not entitled to claim input tax. A reading of the two notifications further shows that the Federal Government itself held the view that the goods acquired by registered person for the purpose of taxable supplies made or to be made though they are not direct constituent and integral part of the taxable goods produced, manufactured or supplied were entitled to claim of deduction of input tax and therefore, a necessity was felt for the exercise of delegated authority to specifically exclude them from the benefit of this provision. Under these two notifications no new class of goods as purported to be, invented under S.R.O. 1307(I)/97 was created.

For the foregoing reasons, it is held that S.R.O. 1307(I)/97 dated 20-12-1997 is in conflict with the provisions contained in sections 7(1) and 8(1)(b) of the Sales Tax Act, 1990. It is further held that because of the above conflict the statutory provision contained in sections 7(1) and 8(1)(b) shall prevail over S.R.O. 1307(I)/97, in pursuance of the principle laid down by the Hon'ble Supreme Court in the case of Sheikh Spinning Mills(Supra). It is also held that the electric panels and transformers on which input tax was paid by the appellant were used for the purpose of taxable supplies and thus, the appellant being registered person was entitled to take input tax paid from the output tax paid while determining its tax liability, as these goods not specified in any notification issued under section 8(1)(b), including S.R.O. 1307(1)/97 were not excluded from the entitlement of deduction of input tax. The learned Tribunal and Respondent No.2 have misdirected in coming to the conclusion that the appellant was not entitled to claim the deduction of input tax and the learned Tribunal has misdirected in upholding the order for recovery of input tax claim, imposition of additional tax under sections 34 and 36 and imposition of penalty under section 33 of the Sales Tax Act. All the three questions formulated for consideration are answered in affirmative. A copy of this judgment shall be sent under the seal of the court, to the Customs, Excise and Sales Tax Appellate Tribunal Karachi III, to pass such orders as are necessary to dispose of the case in conformity with this judgment as required under section 47(5) of the Sales Tax Act, 1990.

The appeal is allowed as above.

S.A.K./G-18/K??????????????????????????????????????????????????????????????????????????????????? Appeal accepted.