PAKISTAN MACHINE TOOL FACTORY (PVT.) LTD., KARACHI VS COMMISSIONER OF SALES, CENTRAL ZONE-B, KARACHI, 2006 PTD-SUPREME-COURT 2331 (2006)

(On appeal from the judgment, dated 22-7-2002 passed by Sindh High Court, Karachi in Sale Tax Reference. No.158 of 1992).

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

----S. 13 & First Sched.---S.R.O.125(I)/1970, dated 29-6-1970 [as amended by S.R.O.540(I)/1971, dated 23-11-1971]---Constitution of Pakistan (1973), Art.185(3)---Gearboxes and axles for using in manufacturing of trucks---Exemption from sales tax-Scope-Supreme Court granted leave to appeal to consider question, whether gearboxes and axles for assembling/manufacturing of trucks would fall within definition of machinery as defined in Exemption Notification and were exempt from sales tax.

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

----S. 13 & First Sched.---S.R.O.125(I)/1970, dated 29-6-1970 [as amended by S.R.O.540(I)/1971, dated 23-11-1971]---Axles for using in assembling/manufacturing trucks---Exemption from sales tax---Scope---Axle not covered by Headings 84.06 & 84.63 of First Sched. of Sales Tax Act, 1990---Axle not a part of engine, thus, would not fall within Heading 84.06-B(ii) of First Sched. of Sales Tax Act, 1990---Axle could not be treated as a transmission shaft so as to bring same within scope of Heading 84.63 of First Sched.---Axle for not being included in another Heading in Table of S. R.O.125(I)/1970 (Exemption Notification) would not qualify for exemption from sales tax---Distinction between "axle" and "transmission shaft" stated.

Oxford English Dictionary Vol.I published at the Clarendon Press at p.600; Webster Comprehensive Dictionary, Second Edition p.102; Chambers Twenty First Century Dictionary Revised Edition p.92; Chambers Twenty First Century Dictionary Revised Edition p.1497; New Webster Dictionary of English Language at p.1047 and Chambers Twenty First Dictionary Revised Edition p.1287 ref.

(c) Words and phrases---

----"Axle"---Meaning.

Oxford English Dictionary Vol.I published at the Clarendon Press at p.600; Webster Comprehensive Dictionary, Second Edition p.102 and Chambers Twenty First Century Dictionary Revised Edition p.92 ref.

(d) Words and phrases---

---"Transmission shaft" and "Axle"---Distinction.

Oxford English Dictionary Vol.I published at the Clarendon Press at p.600; Webster Comprehensive Dictionary, Second Edition p.102; Chambers Twenty First Century Dictionary Revised Edition p.92; Chambers Twenty First Century Dictionary Revised Edition p.1497; New Webster Dictionary of English Language at p.1047 and Chambers Twenty First Dictionary Revised Edition p.1287 ref.

(e) Words and phrases----

----"Transmit"---Meaning.

Chambers Twenty First Century Dictionary Revised Edition p.1497 and New Webster Dictionary of English Language at p.1047 ref.

(f) Words and phrases---

----"Shaft"---Meaning.

Chambers Twenty First Dictionary Revised Edition p.1287 ref.

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

----S. 13 & First Sched.---S.R.O.125(I)/1970, dated 29-6-1970 [as amended by S.R.O.540(I)/1971, dated 23-11-1971]---Gearbox for assembling/manufacturing of truck---Exemption from sales tax---Scope---Gearbox is an integral part of automotive vehicle, without which vehicle could, not be put into motion or operation for performing its respective function---As per Clauses (i) and (iv) of definition of machinery appearing in S.R.O.125(I)/1970, gearbox being component part of machinery would qualify for exemption from levy of sales tax---Principles.

New Webster Dictionary of the English Language p.403, Webster New International Dictionary of the English Language Second Edition p.1041 and Chambers Twenty First Century Dictionary p.554 ref.

(h) Words and phrases-----

----"Gearbox"-Meaning.

New Webster Dictionary of the English Language p.403, Webster New International Dictionary of the English Language Second Edition p.1041 and Chambers Twenty First Century Dictionary p.554 ref.

(i) Notification---

----Exemption notification---Liberal interpretation would not be made for granting exemption from levy of tax in respect of an article---Provision of exemption notification would not be stretched in favour of tax-payer.

Messrs Bisvil Spinners Ltd. v. Superintendent Central Excise and Land Customs Circle Sheikhupura and another PLD 1988 SC 370 fol.

M. Afzal Siddiqui, Advocate Supreme Court and M.S. Khattak, Advocate-on-Record for Appellant.

M. Bilal, Senior Advocate Supreme Court and Raja Abdul Ghafoor, Advocate-on-Record for Respondent No.1.

Date of hearing: 15th February, 2006.

JUDGMENT

SAIYED SAEED ASHHAD, J.---This appeal with leave to the Court has been directed against the judgment of Sindh High Court, dated 22-7-2002 in STR No.158 of 1992.

2. Brief facts of the case requisite for disposal of this appeal are that appellant is a Company owned by the Federal Government, manufacturer of Auto Motive Vehicles Parts including gearboxes and axles. Appellants claimed exemption from levy of sales tax on the gearboxes and axles for the assessment years 1974-75, 1975-76 and 1976-77 in pursuance of Notification No.S.R.O.125(I)/1970, dated 29-6-1970 (hereinafter referred to as the "Exemption Notification") as amended by Notification S.R.0.540(I)/1971, dated 23-11-1971 (hereinafter referred to as the "Amending Notification"). The Sales Tax Officer refused exemption from levy of sales tax, as according to him the gear boxes and axles did not form part of machinery as defined in the exemption notification.

3. Appellants assailed the order of the Sales Tax Officer by way of first appeal before the Assistant Commissioner Income Tax (Appeals) Zone-II, Karachi. The said appeals were decided by the Commissioner Income Tax (Appeals), who allowed the said appeals, set aside the order of Sales Tax Officer and ordered to take the receipts of sales tax during the aforesaid three assessment years as exempt after verifying their nature.

4. Department feeling aggrieved and dissatisfied with the order of Commissioner Income Tax (Appeals) assailed the same by way of second appeal before the Income Tax Appellate Tribunal, Karachi (hereinafter referred to as the "Tribunal") who vide order, dated 1-2-1985 upheld the order of the C.I.T. with certain modification to the extent that the gearboxes and axles were neither covered by heading 84.05 or 87.02 and 87.06 appearing in the First Schedule to the Customs Act, 1969 (formerly the First Schedule to the Tariff Act, 1934) reproduced in the table annexed to the exemption notification.

5. The Department did not accept the order of the Tribunal and moved Reference Application under section 17(1) of the Sales Tax Act, 1951 framing three questions of law requesting the Tribunal to refer the same to the High Court for its opinion. The Tribunal after consideration of the law and the facts referred the following question to the High Court for its opinion.

"Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the Gear Boxes and axles produced by the assessee fall within the definition of machinery as defined in S.R.O.125(I)/70, dated 29th June, 1970, hence, were exempt from sales tax under head '84.63.'"

6. The High Court after hearing the arguments of the learned counsel for the parties, perusal of the material on record, examining the exemption and amending notifications and the law applicable to the case, answered the question in the negative, thus, setting aside the order of the Tribunal and the Commissioner Income Tax (Appeals), Karachi and restoring the order of Sales Tax Officer vide judgment dated 22-7-2002.

7. The appellant feeling aggrieved and dissatisfied with the judgment of the High Court, dated 22-7-2002 filed petition for leave to appeal. This Court vide order, dated 15-1-2003 granted leave to appeal to consider the question whether the gearboxes and axles for assembling/manufacturing of trucks would fall within the definition of machinery as defined in the Exemption Notification and were exempt from levy/payment of sales tax.

8. We have heard the arguments of Mr. M. Afzal Siddiqui, Advocate Supreme Court on behalf of the appellants and Mr. M. Bilal, Senior Advocate Supreme Court on behalf of the respondents.

9. Mr. Afzal Siddiqui, Advocate Supreme Court assailed the judgment on the following grounds:

(i) that the gearboxes and axles were squarely covered by the definition of machinery provided in the Exemption Notification and were entitled for exemption from levy/payment of sales tax;

(ii) that the gearboxes and axles if they did not fall within the definition of machinery provided in the Exemption Notification then they were exempt from payment/levy of sales tax under the headings 84.06, 84.63 of the First Schedule to the Customs Act, 1969, which have been included in the Table of the Exemption Notification; and

(iii) that the Exemption Notification contained two different provisions exempting articles from levy/payment of sales tax. According to him, all articles/items mentioned in the Exemption Notification would be exempt from payment/levy of sales tax irrespective if they were covered by any of the headings of the First Schedule to the Customs Act reproduced in the Table annexed to the Exemption Notification irrespective whether they conformed to the definition of machinery given in the Exemption Notification. Conversely, it was submitted that if an article/item conformed to the above definition of machinery then it would be exempt from levy/payment of sales tax even if it was not specified in any of the headings of the First Schedule to the Customs Act included in the Table.

9-A. -Mr. M. Bilal, Senior Advocate Supreme Court supported the judgment of the High Court and opposed the appeal on the following grounds:

(i) That the High Court had rightly concluded after taking into consideration and examining in minute details the definition of the machinery provided in Exemption Notification that gear box and axle did not fall within the definition of machinery;

(ii) That the High Court rightly held that the finding of the Tribunal that gearbox and axle fell within the clauses 1 and 3 of the definition of the machinery was arbitrary as no plausible reasons or grounds were assigned to establish that the gearbox and axle would fall within the scope of clauses 1 and 3 of the definition of machinery; and

(iii) That the High Court rightly held that the Tribunal failed to take into consideration the word "such" appearing in clause I of the definition of machinery which qualified that only the machinery described in the clauses of the definition of machinery would be exempt from levy/payment of sales tax and no other machinery including heavy auto motive vehicles and parts thereof would be exempt from levy/payment of sales tax.

10. We have considered the arguments of the learned counsel for the parties, have perused the material on record, the provisions of the Exemption Notification and the case-law referred to by Mr. M. Afzal Siddiqui.

11. An Article/Item would be exempt from payment/levy of sales tax under the Exemption Notification if the following two requirements are established:

(i) that the article falls under any of the headings of the First Schedule to the Customs Act, 1969 specified in the Table annexed to the Exemption Notification; and

(ii) that such article is machinery or article for use as machinery or a component part or spare part of machinery used in any industrial process as required in the Exemption Notification.

12. The first requirement, therefore, for determination whether the gearbox and axle manufactured by the appellant are machinery or article or component parts or spare parts as defined in the Exemption Notification is whether they fall within any of the headings of the First Schedule to the Customs Act incorporated in the Table.

13. Mr. Afzal Siddiqui, strenuously argued that according to the scheme of the Exemption Notification an article/item would be exempt from payment of sales tax if it was covered by any of the heading of the First Schedule to the Customs Act incorporated in the Table of the Exemption Notification inasmuch as all such items/articles would independently come within the definition of "machinery" and it was not 'necessary that they should fall within the definition of machinery provided in the Exemption Notification. He also contended that if an article/item was covered by the definition of machinery as provided in the Exemption Notification then it would be exempt from payment/levy of sales tax irrespective of the fact that it was not specified in any of the headings included in the Table of the Exemption Notification. In support of his above contention he placed reliance on the cases of Commissioner of Sales Tax v. Pakistan Welding Electrode 1990 PTD 411 and Collector of Customs (Appraisement) Karachi and others v. Fauji Fertilizer Company Limited and others PLD 2005 SC 577.

14. After going through the cited judgments it may be observed that none of them supports the above contention of Mr. Afzal Siddiqui. In the case of Collector of Customs v. Fauji Fertilizer Company (supra) this Court in view of the provisions of S.R.O.515(I)/89, dated 3-6-1989 as amended by S.R.O.959(I)/89, dated 23-9-1989 pronounced that catalyst was an essential and integral part of the fertilizer plant for manufacturing of fertilizer without which the whole machinery would remain incomplete thus, declaring it to be exempt from levy/payment of customs duty and sales tax. It will be pertinent to mention that in the aforesaid Notification, the headings from the First Schedule to the Customs Act in respect of articles/items exempted from levy and payment of duties and taxes had not been incorporated as is the case in Exemption Notification. Therefore, the question whether catalyst was specified or covered by any of the headings of the First Schedule to the Customs Act was not in issue and an article/item would be exempt from levy of taxes, etc. solely on the ground that it was found to be an essential or integral part of the plant for manufacturing fertilizers. This is not the scheme of the Exemption Notification, which categorically requires that an article/item to be exempt from levy/payment of sales tax firstly, should fall within any of the headings of the First Schedule to the Customs Act incorporated in the Table; and secondly it should conform to the definition of machinery given in the Exemption Notification. The case of Commissioner of Sales Tax v. Pakistan Welding Electrode (supra) instead of supporting the contention of Mr. Afzal Siddiqui contradicts the same. The Sindh High Court in deciding the above case was required to determine the question of exemption from levy/payment of sales tax on "welding electrode" on consideration of Exemption Notification. It observed that in considering whether "welding electrode" would be exempt from charge to sales tax, the first requirement would be that it should be specified or fall within any of the headings of the Table and the second requirement was that it should conform to the definition of machinery as given in the Exemption Notification or was a spare part/component of machinery automotive vehicles.

15. Alternatively, it was argued that assuming for the sake of argument that one of the necessary condition for grant of exemption was that it should be covered by any of the headings specified in the Table annexed to Exemption Notification, the article namely gearbox and axle would be covered by the definition of machinery appearing in the Exemption Notification as they would be treated as component parts of machinery, which is one of the requirements for exemption under the Exemption Notification.

16. From perusal of headings 84.06 and 84.63 it may be observed that axles manufactured by the appellant are not covered by any of the B two above headings. To substantiate the above it will be useful to reproduce both headings 84.06 and 84.63 of the First Schedule to the Customs Act incorporated in the Table annexed to the Exemption Notification:--

17. It was submitted on behalf of the appellant that axle would be covered by heading 84.06-B(ii). The above provisions of heading 84.06 refer to the parts of an engine. An axle cannot by any stretch of imagination be considered to be a part of engine in view of its ordinary meaning in the English Dictionaries reproduced as under:--

The Oxford English Dictionary Vol.I published at the Clarendon Press at page 600 defines the word axle as follows:--

"The center-pin or spindle upon which a wheel revolves, or which revolves along with it.

(a) In carriages, properly, the rounded and more slender ends of the axle-tree, or the pegs fastened into the ends of the axle-tree, on which the wheel actually revolves; but used to include the axle-tree or axle-bar, especially when this is of one piece with the axles proper, or when it revolves with the wheels.

The Webster Comprehensive Dictionary, Second Edition defines axle on page 102 as under:--

"A crossbar supporting a vehicle, and on or with which its wheel or wheels turn; also called axle-tree. A shaft or spindle on which a wheel is mounted and on or with which it turns."

The Chambers Twenty First Century Dictionary---Revised Edition defines axle on page 92 as under:--

"a fixed or rotating rod designed to carry on wheel or one or more pairs of wheels which may be attached to it, driven by it, or rotate freely on it."

From the meanings assigned to the word axle reproduced from the three English Dictionaries, it can conclusively be said that axle cannot be said to be a part of the engine so as to fall within the heading 84.06.

18. An alternative contention on behalf of the appellant .was that if the axle did not fall within the scope of heading 84.06, not being part of an engine then it would fall within heading 84.63 as it can be equated with transmission shaft. This contention would have force if the appellant could successfully establish either that a transmission shaft and an axle were the two names or description of one and the same article/item or that though two different articles yet they could be put to one and the same use or operated in the same field. However, the appellant has failed to do so. On the contrary, from perusal of the ordinary dictionary meanings of .the words transmit, transmission, and shaft, transmission shaft is to be found an entirely different article, performing different functions and put to different uses as component parts of automotive vehicles/machines as compared to axle. It will be appropriate to reproduce the meanings of the above words from various English Dictionaries, which are as under:--

In Chambers Twenty First Century Dictionary Revised Edition' the meaning assigned to the word "transmit" at page 1497 is as under:

"To transfer force, power etc. from one part, e.g. of an engine, mechanical system etc. to an other. One of the ordinary meanings of the word shaft when used in conjunction with an automotive vehicle engines is a rotating rod that transmits motion."

The New Webster Dictionary of English language at page 1047 defines the word transmit to mean:--

"a device to transfer momentum from one part of a machine to another, often changing ratios of power delivery and sometimes direction as in automobile transmission system. On the same page it defines transmission to be a device or unit that transmits power from an engine to a driven component as in an automobile."

The Chambers Twenty First Dictionary Revised Edition on page 1287 assigns the meaning of the word shaft as under:

(i) Long straight handle of a tool or weapon;

(ii) Long straight part or handle of anything;

(iii) In vehicle engines; a rotating rod that transmits motion;

From the meaning of "transmission shaft" and "axle" available from English dictionaries it is impossible to equate the two with one another and to hold that an axle can be treated as a transmission shaft so as to bring it within the scope of heading 84.63. The two articles from their respective meanings are not only dissimilar and distinguishable in their appearance or form but also do not perform identical function and are put to different uses. An axle is a rod which is used in automotive vehicles or carriages for the purpose of producing revolution or rotation in the wheels to put the automotive vehicle/carriage in motion. The working of an axle may be different. It may either be a rod with the wheel(s) attached thereto and only the wheels rotate on the rod or the rod itself rotates or revolves with the wheels. On the other hand, from the meaning of words transmit, transmission, and shaft for assigning the meaning to word transmission shaft, the article/object which comes to mind is a rod which is connected between the two machines, generally between the gearbox and the differential for transferring the power of the engine of an automotive vehicle from a gearbox to the differential. In the circumstances, the contention of Mr. Afzal Siddiqui that axle is the same thing as transmission shaft and would be covered by heading 84.63 of the First Schedule to the Customs Act, included in the Table of the Exemption Notification is not tenable. Axle being an altogether different article, part or component in comparison to transmission shaft is not covered by heading 84.63 and there is no other heading in the Table which includes axle. In view of the observations that the first requirement for exemption from charge of sales tax in view of the Exemption Notification is that the article or the item should fall within any of the headings incorporated in the Table of the Exemption Notification an axle cannot qualify for exemption from levy/payment of sale tax.

19. With regard to the gearbox it was submitted on behalf of the appellant that the same was covered by heading 84.63 of the First Schedule to the Customs Act, which is included in the Table of Exemption Notification. From perusal of heading 84.63 it is to be found that gearbox is included in the said heading for the use in the agriculture machines, tractors and other automotive vehicles. The question, which now requires determination, is, whether gearbox included in heading 84.63 would fall within the definition of machinery as provided in the Exemption Notification. For this purpose definition of Machinery appearing in the Exemption Notification will have to be considered and it will be advantageous to reproduce the said definition, which is as under:--

(i) Machinery, operated by power of any description (excluding agriculture machinery or implements imported into Pakistan) such as is used in any industrial process, including the generation and distribution of power, or used in processes directly connected with the extraction of minerals and timber, construction of buildings, roads, dams, bridges and similar structures and the manufacturer of goods;

(ii) Apparatus and appliance, including metering and testing apparatus and appliances specially adapted for use in conjunction with machinery, specified in item (1) above;

(iii) Mechanical and electrical control and transmission gear adapted for use in conjunction with machinery a specific in item (i) above;

(iv) Component parts, including spare parts of machinery as specific in terms (i), (ii) and (iii) above, identifiable as for use in or with such machinery.

20. A gearbox is basically a container, housing or case, which' contains or encases bearings, cog wheels, gears, shafts and synchronizer unit which operate in a manner to transfer or transmit the power of engine to another part namely, differential for putting an automotive vehicle into motion.

The New Webster Dictionary of the English Language defines gearbox at page 403, "as a case or enclosure for the protection of gears; a motor vehicle transmission".

Webster New International Dictionary of the English Language Second Edition defines the gearbox on page 1041 "a gearbox is a unit comprising the change gears in power transmission system".

The meaning assigned to gearbox in the Chambers Twenty First Century Dictionary at page 554 is as under:--

"Specially in a motor vehicle the set or system of gear that transmits power from the engine to the road wheels, allowing the road speed to be varied while maintaining the engine speed at a constant high level. The metal casing that encloses such a set or system of gears."

21. On consideration of the above dictionary meanings of the word "gearbox" it can conclusively be said that it is an integral or essential part of the automotive vehicles.

22. The question which now falls for determination is whether automotive vehicles would be covered by the definition of machinery given in the Exemption Notification. In this connection clause (i) of the definition clause is very material. According to this clause any machinery used in the process directly connected with extraction of minerals and timber, construction of buildings, roads, dams, bridges and similar structure and the manufacture of goods fall within the definition of machinery. Construction of buildings, roads, dams, bridges and similar structure necessarily require use of automotive vehicles such as tractors, bulldozers, road rollers, heavy trucks, moveable cranes etc. A gearbox is an essential and integral part of all the automotive vehicles referred to above as without it they cannot be put into motion or operation for performing their respective functions. Being an essential and integral part, it can be described as a component part of the machinery mentioned in the clause (i) of' the definition of machinery. Component parts of machinery as mentioned in clause (i) of the m definition have been exempted in view of clause (iv) of the definition. It thus, falls within the definition of machinery as per clause (i) read with clause (iv) of definition of machinery. It, thus, qualifies for exemption from levy/payment of sales tax.

23. Learned counsel for the appellant submitted that according to the settled principle of Interpretation of Statutes, exemption from charge to tax, duty, rate, cess provided by a fiscal statute or notification is required to be interpreted liberally and the provisions of the statute should be stretched in favour of the tax-payer. He further submitted that in view of the above, every possibility should be made to bring the articles/items of the appellant namely gearbox and axle within the scope of exemption granted by the Exemption Notification.

24. On the other hand, Mr. M. Bila1, learned Senior Advocate Supreme Court for the respondents submitted that the fiscal statute or notification granting exemption from taxes duties etc. are to be interpreted rigidly and exemption in respect of taxes, duties etc'. would be granted if the tax-payer succeeded in establishing all the necessary requirements and conditions laid down by the Legislature for grant of exemption. He further submitted that interpretation of fiscal statute or notification granting exemption stands absolutely on a different pedestal than the Interpretation of Statute in imposing pecuniary burden which required strict construction and the charges, taxes duties could only be imposed if' the language used in the fiscal statute was clear, unambiguous and without any doubt.

25. The question of interpretation of fiscal statute/notification granting exemption was considered by this Court in the case of Messrs Bisvil Spinners Ltd. v. Superintendent, Central Excise and Land Customs Circle Sheikhupura and another PLD 1988 SC 370 and pronounced as under:

"As a general rule grants of tax exemptions are given a rigid interpretation against the assertion of the tax-payer and in favour of the taxing power. The basis for the rule here is the same as that supporting a rule of a strict construction of positive revenue laws that the burden of taxation should be distributed equally and fairly among the members of the society. However, exemption claimed by the State or its sub-divisions are usually liberally construed and the same rule has frequently been applied to exemptions made in favour of charitable organization."

26. In view of the above pronouncement the contention of Mr. Afzal Siddiqui that a liberal interpretation is required to be made for granting exemption from levy of sales tax in respect of an article and that the provision of Exemption Notification are to be stretched in favour of the tax-payer has no force and is repelled accordingly.

27. For the above discussion and reasons, it is established that gearboxes manufactured by the appellant qualify for exemption from payment of sales tax in view of Exemption Notification, while axle manufactured by them do not qualify for exemption from payment of sales tax.

28. This appeal is accordingly partly allowed in above terms and the judgment of the High Court is set aside. Judgment of the Tribunal is partially modified as aforesaid. Parties are left to bear their own costs.

S.A.K./P-8/SCAppeal partly accepted.