COLLECTOR OF CUSTOMS, CENTRAL EXCISE AND SALES TAX VS MAHBOOB INDUSTRIES (PVT.) LTD., 2006 PTD-SUPREME-COURT 730 (2005)

(On appeal from order/judgment dated 21-1-2002 and 11-2-2002, passed by the Lahore High Court, Lahore in C. As. Nos.347/2001, 348/2001, 349/2001, 350/2001, 351/2001, 352/2001, 355/2001, 356/2001, 357/2001, 359/2001 and 2/2002).

Sales Tax Act (VII of 1990)---

----Ss. 2(16), 2(33), 3, 33(4) & Sixth Sched.---Central Excise Act (I of 1944), Ss.2(25) & 3---Central Excise Rules, 1944, R.210---Notification S. R.O. No.456(I)/96, dated 13-6-1996---Taxable supply---Polyethylene poly bags, manufacturing of---Respondents were manufacturers of vegetable ghee/oil and authorities issued notices for recovery of sales tax and central excise duty on polyethylene poly bags in which vegetable Ghee/oil was packed---High Court in exercise of Constitutional jurisdiction declared polyethylene poly bags as inseparable part of vegetable ghee and not a distinct product liable to levy of central excise tax and sales tax---Validity---Preparation of pouches/poly bags by converting polyethylene film was a manufacturing process---Word `manufacture' under S.2(25) of Central Excise Act, 1944, included any process incidental or ancillary to the completion of a manufactured product, any process of remanufacture, re-melting, reconciliation or repair and process of packing or repacking such product---Pouches/poly bags manufactured by respondents were capable of being sold in market and it would not make any difference even if conversion of polyethylene bags were manufactured for self or home consumption---Notification S.R.O. 456(I)/96, dated 13-6-1996, issued under S.3 of Central Excise Act, 1944, and Sales Tax Act, 1990, were clearly applicable---Poly bags were put to business use and were not exempt from sales tax under the provisions of S.3 read with Sixth Sched. of Sales Tax Act, 1990---Mere fact that vegetable oil/ghee was exempt from central excise and sales tax would not exclude production/manufacturing of polyethylene poly bags from the ambit of taxable activity. or goods for the purpose of Central Excise Act, 1944 and Sales Tax Act, 1990---High Court took the erroneous view of the matter in treating the manufacturing activity of polyethylene poly bags as an inseparable part of vegetable ghee/oil making and not a distinct product---Judgment passed by High Court was set aside---Appeal was allowed.

Commissioner of Sales Tax and others v. Hunza Central Asian Textile and Woolen Mills Ltd. and others 1999 SCMR 526; Sheikhu Sugar Mills Ltd. and others v. Government of Pakistan and others 2001 SCMR 1376; Messrs Noorani Cotton Corporation v. the Sales Tax Officer "A" Ward, Lyallpur PLD 1965 SC 161; Messrs Pak Cosmetic Products Karachi v. Pakistan through the Secretary, Ministry of Finance, Government of Pakistan, Islamabad and 3 others 1988 CLC 1772; State of Karnataka v. B. Raghurama Shetty and others AIR 1981 SC 1206 and Adil Polypropylene Products Limited and others v. The Federation of Pakistan through Secretary Finance, Federal Secretariat, Islamabad and others 2000 SCMR 1708 rel.

Makhdoom Ali Khan, A.-G. along with Izhar-ul-Haq Sheikh, Advocate Supreme Court and Khurram Hashmi, Advocate for Appellants (In all cases).

Zaeem-ul-Farooq Malik, Advocate Supreme Court for Respondents (in all cases).

Date of hearing: 21st December, 2005.

JUDGMENT

FAQIR MUHAMMAD KHOKHAR, J.---These appeals, by leave of the Court, are directed against judgment dated 21-1-2002, passed by a learned Division Bench of the Lahore High Court in Appeals No. C.As. Nos. 347/2001, 348/2001, 349/2001, 350/2001, 351/2001, 352/2001, 355/2001, 356/2001, 357/2001, 359/2001 and 2/2002.

2. The respondents are manufacturers of vegetable ghee. The appellant served them show-cause notices in that the plastic pouches covered by PCT Heading 3923.0000 produced by them were liable to the central excise duty and sales tax being an independent product. The respondents took the position that the pouch manufacturing was not an independent but a simultaneous process of ghee manufacturing or packing of oil and ghee in those pouches. The same were covered under H.S. Code 15.16 and not 39.23 under the head plastic pouches. They also took the plea that they had not charged any excise duty or sales tax from the consumers. The appellant directed the respondents to pay central excise duty and sales tax along with additional duty and additional tax together with the penalties under Rule 210 of the Central Excise Rules, 1944 and section 33(4) of Sales Tax Act, 1990. Therefore, the respondents preferred appeals before the Customs, Excise and Sales Tax Appellate Tribunal, Lahore, against order passed by the appellant. The Tribunal also found that the poly bags manufactured by respondents were chargeable to central excise duty @ 5% in terms of Notification S.R.O. No.456(I)/1996 dated 13-6-1996 and also to sales tax at the standard tax rate being taxable goods. The respondents filed further appeals before the Lahore High Court, which were allowed by the impugned judgment whereby the levy of the excise duty and sales tax by the Collector as affirmed by the Tribunal were set aside. Hence these appeals by leave of the Court.

3. Mr. Makhdoom Ali Khan, the learned Attorney-General for Pakistan argued that the conversion of polyethylene film into polyethylene poly bags was an independent manufacturing process with a separate entity which was covered by definition of "manufacture" as provided in section 2(25) of the Central Excises Act, 1944 and section 2(16) of the Sales Tax Act, 1990. Therefore, the same were liable to central excise duty as well as the sales tax. The polyethylene poly bags were also taxable supply within the meaning of section 2(33) of the Sales Tax Act, 1990. Therefore, the respondents were rightly required by the appellant to pay the central excise duty as well as the sales tax under section 3 of the Act of 1944 read with S.R.O. No.456(I)/96 dated 13-6-1996, and section 3 of the Sales Tax Act, 1990. In support of his submissions, the learned Attorney-General relied on the cases of Commissioner of Sales Tax and others v. Hunza Central Asian Textile and Woolen Mills Ltd. and others 1999 SCMR 526 and Sheikhu Sugar Mills Ltd. and others v. Government of Pakistan and others 2001 SCMR 1376.

4. On the other hand, Mr. Zaeem-ul-Farooq Malik, Advocate Supreme Court, the learned counsel for the respondents argued that the process of preparation of pouches was simultaneous with the manufacturing of vegetable ghee/oil. Therefore, the plastic pouches prepared by them could not be classified under P.T.C. Heading 3923.3300 but under Heading 3923.0000. It was next submitted that since at the time of assessment, poly bags/pouches were found to be filled with vegetable ghee/oil, the same were to be classified as composite goods under PTC Heading which were exempt. The filling and sealing machinery for packing vegetable ghee in plastic pouches was installed in the premises of mills of the respondents and the same were connected with the kettle of oil/ghee manufacturing plants through pipelines meant for transfer of oil or ghee from kettle to the machine through which the rolls of polyethylene films were folded.

5. We have heard learned Attorney-General for Pakistan as well as the learned counsel for the respondents at length and have also gone through the available record. We find that the preparation of pouches/ poly bags by converting the polyethylene film was a manufacturing process. The word "manufacture" under section 2(25) of the Central Excises Act, 1944 includes any process incidental or ancillary to the completion of a manufactured product, any process of re-manufacture, re-melting, reconciliation nor repair and the process of packing or re-packing such product. The pouches/poly bags manufactured by the respondents were capable of being sold in the market. It would hardly make any difference even if the conversion of polyethylene bags were manufactured for self or home consumption. The Notification S.R.O. No. 456(I)/96, dated 13-6-1996 issued under section 3 of the Central Excise Act, 1944 and the Sales Tax Act, 1990 were clearly applicable. The poly bags were put to business use. They were not exempt from sales tax under the provisions of section 3 read with 6th Schedule of the Sales Tax Act, 1990.

6. In the case of Sheikhoo Sugar Mills Ltd. and others (supra), one of us (Mr. Justice Iftikhar Muhammad Chaudhry, the Hon'ble Chief Justice), speaking for the Court, took the view that Bagasse was an intermediary process which was manufactured/produced during process of extrusion of sugarcane to obtain juice by the Sugar Mills which was consumed as a fuel against the value which was to be calculated at market price excluding the amount of tax if it was not otherwise determinable as such. Therefore, Bagasse being a taxable activity was liable to sales tax under section 3 of the Sales Tax Act, 1990.

7. In the case of Messrs Noorani Cotton Corporation versus The Sales Tax Officer "A" Ward, Lyallpur PLD 1965 SC 161, it was held that keeping of manufactured goods by a manufacture was a sale by virtue of section 2(15), section 3(4)(6)(d) of the Sales Tax Act (Act III of 1951), and the goods became liable to sales tax unless they could be shown to be exempted on some other ground. In Messrs Pak Cosmetic Products Karachi versus Pakistan through the Secretary, Ministry of Finance, Government of Pakistan, Islamabad and 3 others (1988 CLC 1772), Mr. Justice Ajmal Mian (as he then was in the High Court of Sindh), took the view that a process of packing or re-packing of a product was included in the process of manufacturing as defined by section 2(f) of the Central Excises and Salt Act I of 1944. In State of Karnataka versus B. Raghurama Shetty etc. (AIR 1981 SC 1206), the Supreme Court of India held that rice and paddy were two different commodities and after conversion of paddy into rice the assessee was liable to pay sales tax.

8. In the case of Hunza Central Asian Textile and Woolen Mills Ltd. and others (supra) it was held that use and consumption of intermediary goods, in a restricted sense, could be treated as sales by legal fiction so as to bring such goods under the levy of sales tax although the final product was not subject to sales tax when sold. The use or consumption of intermediary goods in such circumstances had a rational nexus with sale.

9. In Adil Polypropylene Products Limited and others versus The Federation of Pakistan through Secretary Finance, Federal Secretariat, Islamabad and others (2000 SCMR 1708), this Court held that the expression "goods" for the purpose of section, 3 of the Central Excises Act was as an item which could be used, bought and sold in the market. These were excisable goods although the same were claimed to be an intermediary products being vendible and having a distinct entity. It was further held that an intermediary product by itself was no ground for not charging the excise duty if the same was covered by the schedule to the Act.

10. The mere fact that the vegetable oil/ghee was exempt from central excise and sales tax would not exclude the production/manufacturing of polyethylene poly bags from the ambit of taxable activity or goods for the purpose of Central Excises Act and the Sales Tax Act. The High Court took the erroneous view of the matter in treating the manufacturing activity of the polyethylene poly bags as an inseparable part of the vegetable ghee/oil making and not a distinct product. The impugned judgment of the High Court is not sustainable at law.

11. For the foregoing reasons, these appeals are allowed. Consequently, the impugned judgment of the High Court is set aside. However, the parties are left to bear their own costs.

M.H./C-3/SCAppeal allowed.