Messrs AMZ SPINNING AND WEAVING MILLS (PVT.) LTD. through Manager VS APPELLATE TRIBUNAL, CUSTOMS SALES TAX AND FEDERAL EXCISE, KARACHI, 2006 PTD-KARACHI-HIGH-COURT-SINDH 2821 (2006)

(a) Notification---

----Provisions of substantive law could not be nullified through a notification or under any sub-legislative measure---Notification deriving its legitimacy on basis of substantive provisions of main enactment could not be termed as violative thereof.

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

----Ss. 7(1) & 8(1)(a)(b)---S.R.O. 578(I)/98, dated 12-6-1998---Input tax paid on purchase of diesel consumed in running of generator for manufacture and production of taxable goods---Claim for adjustment of such input tax---Validity---Legislature under S.8(l)(b) of Sales Tax Act, 1990 specifically empowered Federal Government to deny adjustment of input tax on any item that might be used by taxpayer for manufacture or production of taxable goods or supplies---Section 8 of Sales Tax Act, 1990 on account of non obstante clause would override and prevail over provision contained in S.7 thereof---Such power conferred on Federal Government could only be invoked, when any item was duly notified in official Gazette---S.R.O. 578(I)/98, dated 12-6-1998 derived its legitimacy from provisions of S.8(1)(b) of that Act---Applicant's claim was rejected in circumstances.

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

----S. 8(1)(b)---Notification disallowing tax credit for specified period--Subsequent withdrawal of such notification---Effect---Federal Government was competent to include any item in notification on which adjustment of input tax could not be claimed and to delete any item therefrom---Subsequent withdrawal of notification would not create any justification to avoid tax for period during which same was chargeable.

Sheikh Spinning Mills Ltd v. Federation of Pakistan PTCL 2003 CL 411 ref.

Abdul Rahim Lakhani for Applicant.

ORDER

FAISAL ARAB, J.---The present Special Sales Tax Reference arises from the judgment, dated 7-3-2006 passed by the Customs, Excise and Sales Tax Appellate Tribunal Bench-II, Karachi in Appeal No.H-03/2006 (K-2), wherein following questions of law have been raised for this Court's consideration:--

(a) Whether on facts and circumstances of the case the learned Appellate Tribunal of Customs, Excise and Sales Tax, Karachi, Bench-II was justified to disallow input tax paid on purchase of diesel used for the purpose of production of taxable goods and whereas the applicant is entitled for adjustment under section 8(1)(a) of the Sales Tax Act, 1990?

(b) Whether on facts and circumstances of the case the learned Appellate Tribunal of Customs, Excise and Sales Tax, Karachi Bench-II, was justified to disallow input tax on diesel in the light of para. 11 of S.R.O. 578(I)/98, dated 12-6-1998 whereas the said para contradicts with substantive provision of section 8(1) of the Sales Tax Act, 1990?

Briefly stated, the facts of the case are that the applicant has its Spinning and Weaving Mills at Kotri. For running its power generator at the mills, the applicant purchased diesel. For the purchases of diesel made from October to December, 2002, the applicant adjusted sales tax amounting to Rs.218,145 as input tax, claiming that the same was used for production and manufacture of taxable goods and supplies. The Sales Tax Authorities considered the claim of the applicant as inadmissible under S.R.O. 578(1)/98, dated 12-6-1998 and served show-cause notice, dated 19-3-2005 upon the applicant.

The applicant contested the proceedings on the ground that sales tax paid on diesel was liable to adjustment. The Sales Tax Authorities rejected applicant's claim vide order in original, dated 2-6-2005. The applicant then preferred appeal before the Appellate Authority which vide order, dated 3-8-2005 maintained the order in original passed by the Sales Tax Authorities. The applicant then preferred appeal before the Tribunal which too met the same fate. Aggrieved by the order of the Tribunal, the present reference has been preferred by the applicant before this Court.

Mr. Abdul Rahim Lakhani, learned counsel for the applicant argued that diesel was consumed in the manufacture and production of taxable goods and supplies and sales tax paid on diesel is liable, to be adjusted as envisaged under section 7(1) of the Sales Tax Act read with section 8(1)(a) of the Act. He therefore, contended that refusal of the Sales Tax Authorities to allow adjustment on the strength of S.R.O. 578(I)/98, dated 12th June, 1998 which is subordinate legislation, amounts to nullifying the object and intent of the legislature stated in sections 7(1) and 8(1)(a) of the Sales Tax Act.

There is no cavil with the legal proposition that provisions of substantive law cannot be nullified by the Federal Government through a notification or under any sub-legislative measure. However, in order to examine the question whether S.R.O. 578(I)/98, dated 12th June, 1998 is violative of any provision of Sales Tax Act, 1990 it would be worthwhile to reproduce provisions of section 7(1) and section 8(1) of the Sales Tax Act as well as the S.R.O. 578(I)/98, dated 12th June, 1998.

Sections 7(1) and 8(1) of the Sales Tax Act, 1990 read as follows:--

Section 7. Determination of Tax liability:---(1) For the purpose of determinating his tax liability in respect of taxable supplies made during a tax period, a registered person shall (subject to the provisions of section 73), be entitled to deduct input tax (paid or payable) (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.

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

(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;

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

S.R.O. 578(1)/98, dated 12th June, 1998, which was issued under section 8(1)(b) of the Sales Tax Act, 1990 reads as follows:

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(I)/97, dated the 20th December, 1997, the Federal Government is pleased to specify that the following goods acquired otherwise than as stock in trade by a registered person to be goods in respect of which input tax shall not be claimed namely:--

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11. POL products other than (JP-1 purchased by PIA and other domestic airlines) furnace oil, lubricants and greases).

(2) This Notification shall take effect from the 1st day of July, 1998.

Section 7(1) of the Sales Tax Act entitles a taxpayer to deduct sales tax paid on goods which are used for the production and manufacture of taxable goods or supplies. Section 8(1)(a) provides that a taxpayer shall not be entitled to seek such adjustment in case the goods on which sales tax has been paid at the time of their purchase have not been used for the production and manufacture of taxable goods or supplies.

Section 8(1)(b) on the other hand is clear deviation from the above referred criteria provided in section 7(1)and section 8(1)(a) as section 8(l)(b) disentitles a taxpayer to claim adjustment of input tax even on such goods which though otherwise were entitled for adjustment, but on account of being specified by the Federal Government in the official Gazette, are denied the benefit of adjustment. Thus under section 8(1)(b), the legislature has specifically empowered the Federal Government to deny adjustment of input tax on any item which may have been used by a taxpayer for the manufacture or production of taxable goods or supplies.

The argument of learned counsel for the applicant that benefit of adjustment of input tax could not be denied to applicant through a subordinate legislation as this amounts to nullifying the intent of the legislature as envisaged in sections 7(1) and 8(1)(a) of the Act is therefore misconceived. In our view the disentitlement to seek adjustment is based upon provision of section 8(1)(b) itself. The very purpose of enacting section 8(1)(b) was to deny adjustment of input tax also on such items which though are used in the manufacture and production of taxable goods or supplies but the Federal Government in its discretion denies to extend such benefit to the taxpayer. We don't see any other purpose of section 8(1)(b) other than this. If the intention of legislature was to deny adjustment of input tax only on such items which were not used for making taxable goods and supplies, then the provisions of section 8(1)(a) were sufficient to cover such a situation and there was no need to incorporate section 8(1)(b). Thus it is under the provisions of section 8(1)(b) itself that the Federal Government derives power to notify items against which adjustment cannot be claimed though used in the making of taxable goods and supplies. Where the notification itself derives its legitimacy on the basis of the provisions of the main enactment i.e. section 8(1)(b), then how such notification can be termed as violative of the provisions of the Sale Tax Act.

The power conferred on the Federal Government under section 8(l)(b) can only be invoked when any item is duly notified in the official Gazette as the provisions of section (8)(1) (b) by itself are not self-executing provisions. Therefore to achieve this object a notification has to be issued. Therefore there is no justification to term the impugned notification as violative of the provisions of the sales Tax Act.

It is pertinent to observe, that, on account of non obstante clause in section 8, it shall override and prevail over the provision contained in section 7.

From the above discussion it has become quite clear that S.R.O. 578(I)/98, dated 12-6-1998, was issued by the Federal Government on the basis of legislative authority conferred upon it by section 8(1)(b) of the Sales Tax Act, 1990, which clearly provides that the Federal Government may specify such goods in respect of which input tax shall not be claimed for adjustment against output tax.

Mr. Abdul Rahim Lakhani, learned counsel for the applicant referred to the case of Sheikh Spinning Mills Limited v. Federation of Pakistan reported in PTCL 2003 CL, 411 and submitted that in the said judgment the learned Single Judge of the Lahore High Court has held that notwithstanding issuance of S.R.O. 578(I)/98, dated 12-6-1998, adjustment of diesel is admissible if the same was used for the manufacture or production of taxable goods.

We have read the referred judgment and find that in the said case the matter was not finally decided but it was disposed of with a direction to the petitioner to approach the competent authority. In the said judgment it was however observed that the competent authority shall decide the controversy after taking into consideration the question whether S.R.O. 578(I)/98, dated 12-6-1998 is in conflict with the provisions of Sales Tax Act.

With great respect to the learned Judge, we are of the opinion that insofar as the question of S.R.O. 578(I)/98, dated 12-6-1998 being in conflict with the provisions 'of Sales Tax Act is concerned, the same does not arise as S.R.O. 578(I)/98, dated 12-6-1998 itself derives its legitimacy under the provisions of section 8(1)(b) of the Sales Tax Act.

Confronted with the above legal position, the learned counsel for the applicant stated that subsequently through a separate notification, S.R.O. 578(I)/98, dated 12-6-1998 has been amended whereby the diesel has been omitted from the list of goods against which input tax could not be claimed. On the basis of this subsequent change, he argued that since the benefit has now been extended, such benefit be also extended to the applicant for the period which is subject-matter of the present controversy. This plea has been taken on the ground that the Courts have many times given retrospective effect to beneficial legislation.

We do not agree with this argument advanced by the learned counsel for the applicant: The question of retrospective effect of a beneficial legislation does not arise in the present case. The issue involved in the present case is purely of validity of taxing provision. It is the prerogative of the legislature to impose any tax which it is legally competent to impose under the Constitution. It can choose the duration during which it is to be imposed and can also withdraw any tax at any time. Subsequent withdrawal of a tax does not create any justification to avoid the tax for the period during which it was chargeable. The Federal Government was within its right to include any item listed in S.R.O. 578(I)/98, dated 12-6-1998 on which adjustment of input tax could not be claimed and was equally competent to subsequently delete any items from such list. For the entire period during which an item was part of the notification issued under section 8(1)(b) of the Sales Tax Act, no adjustment of input tax could be claimed by a taxpayer.

In view of the above discussion both the questions referred for our decision are answered in the affirmative.

Vide short order, dated 29-8-2006, we dismissed this reference in limine. The above are the reasons for the same.

S.A.K./A-119/KReference dismissed.