2007 P T D (Trib
2007 P T D (Trib.) 2325
[Income-tax Appellate Tribunal Pakistan]
Before Khawaja Farooq Saeed, Chairperson, Javid Iqbal, Judicial Member and Mrs. Abida Ali, Accountant Member
I.T.As. Nos. 544/PB of 2003 and 552/PB of 2004, decided on 21st June, 2005.
Per Javid Iqbal, Judicial Member:
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 80C(2)(a)(ii), 143B, 50(5) & 62---C.B.R. Circular No.12 of 1991, dated 30-6-1991---C.B.R. Circular No. 1(14) TP-H/91, dated 29-6-1991---C.B.R. Circular No.1(42)(WHT)/2000, dated 30-6-2001---Tax on income of certain contractors and importers---Import and sale installation of CNG kits and cylinders---Tax was withheld at the import stage under S.50(5) of the Income Tax Ordinance, 1979 on such imported kits and cylinders---Assessee claimed himself as manufacturer of kits and cylinders on the basis of installation of such kits and cylinders in the vehicles and computed the income under normal law instead of filing of statement under S.143B of the Income Tax Ordinance, 1979---Assessing Officer treated the amount of tax withheld under S.50(5) of the Income Tax Ordinance, 1979 on import of kits and cylinders as final liability on the basis of Central Board of Revenue's Circular No.12 of 1991, dated 30-6-1991---First Appellate Authority annulled the assessment framed under S.80C of the Income Tax Ordinance, 1979 and assessee was considered as manufacturer of gas kits and cylinders---Validity---Assessee was not involved in manufacturing or in the process of manufacturing of gas kits and cylinders, while the installation of these items in the motor vehicles could not be termed as manufacture---Sole criteria for manufacturing was that in this process a new and vendible product must come in existence, which must be distinct and different from the feed in material---No such activities had taken place, while without manufacturing activities, the question of consumption of raw material of undertaking did not arise---Order of First Appellate Authority was vacated and that of Assessing Officer was restored by the Appellate Tribunal.
United States v. Anderson, D.C. Cal. 45F. Supp. 943, 946; Blacks Law Dictionary; Cain's Coffee Co., v. City of Muskogee 171 OLD 635, 44 P. 20 50, 52; Civil &Military Press v. Pakistan 1985 CLC 1021 and 1999 PTD 793 ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 13(1)---Addition---Addition made under the head "securities with Sui Gas and WAPDA" was deleted by the First Appellate Authority as the same was deposited in the preceding assessment year and it was relevant at the preceding assessment year and addition could not be made for year under consideration---Deletion of such addition was confirmed by the Appellate Tribunal, while deletion of addition for want of approval from the Inspecting Additional 'Commissioner was also approved.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 24(ff)---Deductions not admissible---Addition on account of non payment of rent in accordance with law in the prescribed manner through cross cheques---Deletion of---Validity---First Appellate Authority was not justified to delete the addition and deletion of such addition was cancelled by he Appellate Tribunal.
(d) Income Tax Ordinance (XXXI of 1979)---
----S. 62---C.B.R. Circular No.12 of 1991, dated 30-6-1991---Assessment on production of accounts, evidence etc:---Sale of CNG---Declaration of sale according to formula issued by the Central Board of Revenue---Rejection of sale---Validity---Order of lower authorities were set aside with the directions that sales should be adopted as per formula of C.B.R. notified vide Circular No.12 of 1991, dated 30-6-1991 while for the other assessment year trading addition made being unjustified was deleted by the Appellate Tribunal.
Per Khawaja Farooq Saeed, Chairperson, agreeing:
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 80C(2)(a)(ii)---`Manufacturing'---Basic requirement to declare an item as manufacturing by some one is the change in the shape of the goods and its utilization other than its original shape and requirement.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 80C(2)(a)(ii)---`Industrial undertaking'---Meanings---Industrial undertaking means an organization which is working as an `industry' which connotation has normally been understood for the bigger projects---Use of term `small industry' and 'cottage industry' had given. it the meanings which covers even a process of the smallest farm---One person alone involved in some manufacturing process can be considered as running an industry if he is using some input for conversion into some other-shape for making it a vendible product.
(g) Income Tax Ordinance (XXXI of 1979)---
----S. 80C(2)(a)(ii)---Exception---Entitlement---Import of raw material and its use for own consumption provides exception.
(h) Income Tax Ordinance (XXXI of 1979)---
----S. 80C(2)(a)(ii)---`Raw'---Meanings---`Raw' means something in natural shape in crude form having never been brought to any change through any manual or mechanical process.
Chambers 20th Century Dictionary and As per Black's Law Dictionary ref.
(i) Income Tax Ordinance (XXXI of 1979)---
----Ss. 80C(2)(a)(ii), 143B, 50(5) & 62---Tax on income of certain contractors and importers---Import and sale/installation of CNG kits and cylinders---Claim of exemption from presumptive tax regime---Validity--Items imported were highly technical already manufactured and very advanced machinery, its further attachment, not being a raw material could not help in getting exemption from 'the presumptive tax regime---Import made under S.50(5) of the Income Tax Ordinance, 1979 by the assessee was in full and final discharge of income tax as he was not consuming any, raw material in his own manufacturing process--Process through manufacturing the assessee was not entitled to the option far the assessment under normal law---Import was taxable under presumptive tax regime and tax deducted was full and final discharge.
(j) Words and phrases---
----"Raw"---Meaning.
Chambers 20th Century Dictionary and As per Blacks Law Dictionary ref.
Per Mrs. Abida Ali, Accountant Member, Contra:
Mir Alam, D.R., for Appellant.
Abdul Rehman Afridi for Respondent.
ORDER
JAVID IQBAL (JUDICIAL MEMBER).--This order will dispose of two appeals relevant to assessment years 2000-2001 and 2001-2002. Appeal for assessment' year 2000-2001 has been filed on behalf of department against the impugned order recorded in Appeal No.1840, while appeal for assessment year 20-01-2002 has been instituted on behalf of assessment against the impugned order, arising: out of Appeal No.64, dated 19-8-2004. Department has agitated that the learned CIT(A) was not justified to delete the addition made under section 13(1)(d) of the repealed. Ordinance at Rs.5,90,000 and Rs.17,000 under the heads security deposited with Sui Gas and WAPDA Deptts., deletion of addition under section 24FF of the repealed Ordinance and curtailment of addition out of P&L experiaes to 15% while it has also been challenged that; assessee is not a manufacturer, therefore, CIT(A) was not justified to compute the normal assessment instead of completion of the assessment under section 80C about the tax withheld under section 50(5) at the import stage of gas cylinders and kits. While for assessment year 2001-2002 assessee "has challenged the impugned finding on the following grounds:---
(a) That sale of gas cylinders and gas kits is not covered by the provision of section 80C.
(b) That income from workshop has already been included in the sale of cylinders and gas kits, therefore, it should not have been taken separately, as the assessee was engaged in simple commercial activities i.e., sale of cylinders and kits, therefore, there would be no question of earning income from the workshop.
(c) That Circular No.12 of 1991 is not applicable to the case of the assessee.
(d) That learned CIT(A) should not have been deleted the addition of Rs.100,000 in trading instead of setting it aside for further examination.
(e) That learned/CIT(A) was not justified to confirm the add-backs made in postage/telephone, entertainment, fees and subscription and miscellaneous expenses.
2. We have heard learned representatives of the parties and have also perused the relevant record.
3. Brief facts of the case are that assessee in the status of AOP is running a CNG Filling Station along with sale/installation of CNG kits and motor vehicle. For assessment year 2000-2001 assessee declared net income at Rs.8,33,227. During the year under appeal assessee imported kits and cylinders where tax under section 50(5) was withheld at the import stage. At the time of filing of return assessee by claiming that he is manufacturer of kits and cylinders declared and computed the income under the normal law instead of filing of statement under section 143/B of the repealed Ordinance. Assessment was completed under the normal law because of the each that the capital contributed by the partners was of such amount, which does not fall under the purview of SAS. The Assessing Officer completed the assessment at Rs.28,90,925, while the tax withheld under section 50(5) was considered as final liability under section 80C of the repealed Ordinance. Similarly, for assessment year 2001-2002 assessee declared net income from all the sources, which was assessed at Rs.17,27,042 where net income from the sale of gas was worked out at Rs.5,73,328. The import of kits and cylinders were subjected to tax under section 80C of the repealed Ordinance and the amount of tax withheld under section 50(5) on import of kits and cylinders was treated as final liability on the basis of C.B.R. Circular No.12 of 1991. The treatments thus meted out by the Assessing Officer were assailed before the learned CIT(A). For assessment year 2000-2001 relief was provided to assessee, additions made under section 13(1)(d) and 24ff were deleted and assessee was also declared as manufacturer of gas kits and cylinders. Assessee was considered manufacturer and the completion of assessment under section 80C was annulled by the learned CIT(A). While for assessment year 2001-2002 assessment order was confirmed, vide Appellate Order No. 64, dated 19-8-2004.
4. We have considered the arguments of both the parties, have perused the order of the lower fora and have also examined the other relevant materials. The issues involved are as to whether the tax withheld under section 50(5) at the import stage on the gas kits and cylinders are final discharge of liability under section 80C of the repealed Ordinance or not. For assessment year 2000-2001 vide the impugned appellate order recorded in Appeal No.1840, dated 2-8-2003 assessee has been declared as a manufacturer and tax deducted under section 50(5) at the import stage on import of gas kits and cylinder has not been discarded as the final discharge of tax' liability, while for assessment year 2001-2002 assessment framed by Assessing Officer the tax withheld as final discharge of liability under section 80C of the repealed Ordinance has been confirmed. For assessment year 2000-2001 on this issue Department is in appeal, while for assessment year 2001-2002 assessee is in appeal. For assessment year 2000-2001 the operative portion of the impugned order is reproduced as under:--
"That assessee firm is an industrial undertaking as evident from the industrial tariff applied by WAPDA and this is the first condition to fall out of the regime of section 80C as enumerated in para. 1(b) of Circular No.12 of 1991 has been fulfilled.
The assessee does not sell the kits and cylinders to the customers but used these items along with other items/accessories for conversion of petrol driven vehicles to CNG driven vehicles and the Assessing Officer has .not been able to detect that the assessee had even sold these items as itself to customers, that first installing the same in their vehicles for which the assessee claimed fitting charges and general store items. The aforementioned views in the opinion of the learned CIT(A) covers the second condition of Circular No.12 of 1991.
According to the judgment relied upon by the A.R. the word "consumption" connotes any kind of use, therefore, fitting of these items in the vehicle of the customers fall in the definition of consumption.
The Assessing Officer has accepted the .fitting charges and general store items of kits and cylinders in toto, which shows that he has accepted that these items were not sold by the assessee but they were fitted/used in the process of conversion of petrol driven vehicles to CNG driven vehicles.
The Ministry of Petroleum and Natural Resources, Government of Pakistan has imposed restriction on sale of kits and cylinders in the open market.
The Assessing Officer has not rebutted the explanation offered by the assessee and without commenting, referring to the same has treated the tax under section 50(5) on these items under section 80C of the repealed Ordinance, which is illegal and not sustainable in law. The learned/authorized .representatives of the parties assessee delivered the following arguments."
The learned D.R. contended that for assessment year 2000-2001 the learned CIT(A) has misconceived the facts and the legal position of the matter. While for assessment year 2001-2002 the impugned action of learned CIT(A) is well in accordance with the facts and law. The learned A.R. of the assessee stated that the assessee derives income from a Gas Filling Station and from running, a workshop where the petrol engines are converted to enable them to consume CNG in addition to petrol. Machinery worth Rs.38,40,164 was installed as on 30-6-2000 and Rs.51,65,761 as on 30-6-2001. The plant and machinery are operated with a view to convert "natural gas" into "compressed natural gas". The properties of both these gases are completely different from each other which has amply been explained in the order of the first appellate-authority, dated 2-8-2003. But for this process of conversion, the natural gas would be completely useless for consumption in motor vehicles. The conversion would be appreciated as a complex process: For this reason, Filling Station dealing in the supply of CNG have been included in the definition of manufacturers and dealt with accordingly. The assessee has a workshop which is engaged in the installation of gas cylinders and gas kits and other accessories in motor vehicles to enable them to consume CNG prepared by the assessee and other such establishments. The conversion procession is conducted by expert engineers and mechanics under .license from the Government. The cylinders and gas kits are imported by the assessee and tax is withheld under section 50(5) of the Ordinance. Ordinarily, tax collected under section 50(5) is the final discharge of tax liability, but according to section 80C(2)(ii) of the Ordinance, this would not be so if the importer is an industrial undertaking, importing gas as raw material for its own consumption. That the assessee is an industrial undertaking as regard production of CNG and the assessee case is that it is an industrial undertaking even as regards the installation of gas cylinders and gas kits in motor vehicles which results in conversion of engines to both gas and petrol consumption machines and .which fact is proved from the import of cylinders and gas kits are not disposable in the market. So, their sale is not a commercial activity. The cylinders and kits are installed in vehicles by engineers having specialised knowledge in this field who are supposed to give a certificate of fitness of the installation. A number of other accessories are also used along with kits and cylinders. In these cases the installation gives a completely different shapes from the parties, which serve completely a different purpose. Thus a lot of value is added to machinery used, which is possible only in an industrial process. The C.B.R. has explained vide Circular No. 1(14)TP-II/91, dated June, 29, 1991 that assembly and manufacture of motor bikes would fall within clauses (118-C)(d), (118D) (d) and (118-E)(e) of the Second Schedule of the repealed Income Tax Ordinance. It was also pleaded that vide Circular No.1(42)(WHT)/2000, dated June 30, 2001 about the subject clarification has been made about the adjustment of tax deducted under section 50(5) on the CNG equipment. It was contended by the learned A.R. that the kits and gas cylinders are used in the CNG Filling Station, hence these are also covered by the above referred Circular.
Before proceeding further it would be useful to reproduce the various dictionary meanings of manufacturing:--
(i) Manufacture includes any process incidental or ancillary the completion of the manufacturing product and any process of re-manufacturing, remarking and repacking such products. The word manufacture is composed of manus and facture, literally, put together by hand or machinery. United States v. Anderson, D.C. Cal. 45F. Supp.943,946.
(ii) Blacks Law Dictionary observes the meaning of word "manufacture", which is defined as the making of goods or wares by manual labour or by machinery, especially on a large scale, has expanded as workmanship and art have advanced, so that now nearly all artificial products of human industry, nearly all such materials as have acquired changed conditions or new and specific combinations, whether from the direct action of the human hand, from chemical process devised and directed by human skill or by the employment of machinery, are commonly designated as "Manufactured".
Manufacture, Noun the process of operation of making goods or any material produced by hand, by machinery or by other agency, anything made from raw materials by the hands, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualifies properties or combinations, whether by hand labour or machine, Cain's Coffee Co., v. City of Muskogee, 171 OLD-635, 44p. 20-50, 52.
In patent law, manufactured goods denote any useful product made directly by human labour, or by the aid of machinery directed and controlled by human power and either from raw material's or from materials worked up into a new form. In the case titled Civil and Military Press v. Pakistan cited as 1985 CLC 1021 it was held that the word manufacture is generally understood to mean bringing into existence a vendible product known in the market.
From the definition the outcome is that manufacturing is a process in which input and output give rise to vendiable product i.e. through this process a new and vendiable substance comes into existence.
Further support has been lent from the case law reported as 1999 PTD 793 the brief facts of which are that in that case assessee being a private limited company returned income at Rs.276,889. Exemption was claimed with reference to clause 118-C of the Second Schedule to the Income Tax Ordinance, which was accepted by the Assessing Officer in the first instance. However, the revising authority IAC by way of an order, dated 25-2-1997 directed cancellation of the assessment framed on 3-9-1996, inter alia, for the reason that the Assessing Officer completely deviated from the legal provisions and proceeded in ultra vines manner. Further that she granted exemption from tax to a company holding it to be a manufacturer whereas the company could not be so described by any stretch of imagination. During the course of usual proceedings and after confronting the assessee with the proposed intention the revising authority also made a reference to C.B.R. Circular No.9 of 1992 which stated that an essential prerequisite of the concession being that the industrial undertaking was engaged in manufacturing process of goods and materials. The revising authority after rejecting the submissions made by the assessee that the proposed exercise of revisional jurisdiction was illegal and that the process undertaken by the assessee fulfilled the requirement of being a manufacturer as contempleted in the aforesaid clause proceeded to hold it to be a simple case of packing of a product. In the view of the revising authority the business of the assessee consisted of storage of LPG in tanks and then filling them up in 11 kgs cylinders and to sell them. A parallel was drawn between the activities of the assessee-company and petrol pumps to say that both were mere selling out points to cater the needs of retail customers after having purchased the produced in bulk. As a fact it was also noted that the assessee started lifting LPG from the principal company Messrs OGDC in the month of September, 1994 while the storage tanks were installed in the month of February, 1995. The activity in the intervening period was found as a clear pointer that the case of the assessee could not fall within the ambit of exemption clause as the LPG during this period was sold through bowsers while the exemption was allowable only to a company exclusively engaged in manufacturing activity. Lastly to strengthen his view of the exercise of revisional jurisdiction mention was also made of the fact that not a single gas distribution company in Pakistan was allowed exemption .under the said clause of the Second Schedule to the Income Tax Ordinance, 1979. Against the order under section 66-A of the repealed Ordinance assessee went in appeal before the learned ITA and the learned Accountant Member considered the assessee as manufacturer, while the learned Judicial Member was of different opinion.
Observation of the Accountant Member
The learned Accountant Member observed that submission of the assessee's representative that LPG bulk supplies upto March, 1995 were incidental to manufacturing business and therefore part of the manufacturing income, cannot be accepted. Sale of raw material may be incidental to manufacturing, it may have been even essential to safeguard the main objective of the Company as urged by .the A.R. but income from LPG bulk supplies as received from OGDC without any processing cannot be considered manufacturing income for the .purposes of clause 118(c) and therefore the DCIT is directed to tax the income arising from these supplies while her decision regarding exemption of income of the industrial undertaking under the provision of clause 118(c) is upheld and the exemption granted shall remain available to the assessee as regards the income of the industrial undertaking.
The appeal has been fully disposed of only on the point whether the assessee is a manufacturer or not, the other grounds included in the grounds filed do not need be considered.
Observation of the Judicial Member
Learned Judicial Member, however, thought otherwise. He was neither impressed by the process explained in detail by the learned Accountant. Member but also expressed his reservation about the relevancy of the reported judgment which Neighed with the learned Accountant Member while reaching a conclusion favourably to the assessee. He cited with favour the views of the C.B.R. expressed through S.R.O. 1283(I), dated 13-10-1990 to say that for availing foresaid concession of exemption an undertaking should necessarily be engaged in manufacturing activity. In his view-pole criterion being that in manufacturing a new product is brought into existence, which is distinct or different from the feed in material. On the other hand, according to the learned Judicial Member the operation carried on by the assessee was not directed towards the "manufacture to production" of LPG gas as it did not bring into existence any product, which was something new or distinct or different from the- material used. Finding that the gas even after having undergone the alleged process remained the same as it was before the learned Judicial Member different with the view expressed by the learned Accountant Member. His conclusion being that the order of the Assessing Officer is allowing claimed exemption under clause 118(c) of the second Schedule to the Ordinance being that the order of the Assessing Officer in allowing claimed exemption under clause 118(c) of the Second Schedule to the Ordinance being erroneous as well as prejudicial to the interest the Revenue the .revising authority was fully justified in exercising the revisional jurisdiction as vested with him under section 66-A of the Income Tax Ordinance.
The case was referred to the third, Hon'ble Judicial Member where the question framed was as follows;-
"Whether on the facts and circumstances of the case the learned IAG is justified in canceling the assessment and holding that the process being carried on by the assessee was not manufacture`?"
The relevant observation of the- third Hon'ble Judicial Member is as under:--
"That the assessee is not engaged in any manufacturing or manufacturing process is also evident from the admitted position that even before the installation, of the alleged plant and machinery it received and sold liquefied petroleum gas, According to the record the assessee started receiving LPG from Messrs OGDC from 15-9-1994. The storage tanks and plant for filling in LPG cylinders did not start working till March, 1995. The assessee claims that during this period it had to lift the allocated quota of gas from OGDC under the terms of agreement and that it sold the gas to lift in the market through bowsers. Learned A.M. also agreed that selling of gas through bowsers was not manufacture and therefore ordered the income declared from this source to be taxed. Apparently the learned A.M. ignored that after installation of plant and machinery the only change that happened was that instead of bigger containers the gas was filled and sold through smaller containers. A bowser is nothing more than a bigger container as compared to cylinder, If selling of gas through bowser or bigger containers could not be taken as manufacturing or manufacturing process then the same activity through smaller pattern could also not involve any manufacturing. The cutting of a baked bread into 20 pieces does not involve manufacturing any better if the number of pieces is reduced to 10."
Therefore, in the facts and circumstances of the case I will join learned brother, J.M. to say that the I.A.C. was justified in cancelling the assessment and holding that the process being carried on by the assessee was not manufacturing... The answer to the question is, therefore, in the affirmative.
From the conclusive paras. of the impugned order it has been noticed that while considering the assessee as manufacturer of gas kits and cylinders, the learned CIT (A) has altogether concentrated on CNG station. As regards the tariff of WAPDA, there is no doubt that assessee is paying the tariff of WAPDA on industrial basis, it is so because assessee is running CNG station, but beside running the CNG station assessee is also running workshop in which the work of fitting of Gas kits and cylinders, which without going any process of assembling and any change in form with the help of certain accessories are attached to the engine of motor vehicle. However, the accessories which are attached to inject the engine on gas, also being part and parcels of kits and cylinders imported along with the kits. By installation of gas kit and cylinder the engine of motor vehicle is not converted to CNG but additionally the motor vehicle is run by gas besides the petrol. The notification as referred by learned AR of the assessee has no relevancy to Gas kits and Cylinder. Rather it is relevant to the machineries and equipments which are used part and parcel of CNG filling station. The gas kits and cylinders are not at all the parts of CNG filling station, rather these are different and separate items to that of machinery and equipment of CNG.
The upshot of the above discussion is that assessee is not involved in manufacturing or in the process of manufacturing of gas kits and cylinders, while the installation of these items in the motor vehicles could not be termed as manufacture. For manufacturing the sole criteria is that in this process a new and vendible product must come in to existence, which must be distinct and different from the feed in material. In this case, no such activities have taken place, while without manufacturing activities, the question of own consumption of raw material of an undertaking does not arise, therefore, the order of learned CIT(A) for assessment year 20nn-2001 is vacated by restoring the assessment order, while, for assessment year 2001-2002 the impugned finding is confirmed.
As regards the objection of department about the deletion of addition made under section 13(1) of the repealed Ordinance at Rs.5,90,000 and Rs. 17,000 under the heads securities with sui gas and WAPDA, the learned CIT (A) has observes that the security to sui gas has been deposited in the preceding assessment year, therefore, it is relevant to the preceding assessment year and addition could not be made for the year under appeal. Which is quite conclusion, hence confirmed, ' while regarding the security deposit of WAPDA at Rs.17,000 the learned CIT(A) has deleted the addition for want of approval from the IAC, which is also approved.
As regards the objection of department about the deletion of addition under section 24(ff) on account of payment of rent amounting to Rs.2,40,000, the same was not paid in accordance to law in the prescribed manner through cross cheques, hence the learned CIT(A) was not justified in deleting the addition under this head. Therefore, deletion of addition is cancelled.
As regards the objection of department about the acceptance of books of accounts and declared sales, on this count for the estimation of sale of CNG station the C.B.R. has issued the formula and' for assessment year 2001-2002 assessee himself has declared the sale according to this formula. Therefore, for assessment year 2000-2001 the order of lower authorities are set aside on this count with the directions that sales should be adopted as formula of C.B.R. notified vide Circular No.12 of 1991. While for assessment year 2001-2002 the trading addition made of Rs. 1,00,000 being unjustified, therefore, deleted.
As regards the workshop income for assessment year 2000-2001 it has been adopted at Rs.5,00,000, while for assessment year 2001-2002 it has been adopted at Rs. 1,70,000. So far the plea of assessee is concerned it is not tenable because assessee is not a manufacturer of gas kits and cylinder as held supra, while assessee from the installation of Gas Kits and cylinders to the motor vehicles and from the service tuning etc. is earning the income, however the income estimated for both years seems somewhat excessive, therefore, it is reduced to Rs.1,30,000 and Rs. 1,50,000 for the years under appeals respectively. While the add-backs towards postage an telephone disallowances at 15 %being proper is confirmed for both the years under appeal. While for the other expenses the learned CIT(A) for assessment years 2000-2001 has restricted the disallowances to 15 % of the total claim, therefore, for assessment year 2001-2002 these should also be restricted to the same ratio.
In this way both the appeals are disposed of accordingly.
[As per Mrs. Abida Ali, Accountant Member, Contra.]-With due respect I disagree with the views expressed by my learned brother the Judicial Member that assessee falls under the ambit of section 80C of the repealed Ordinance, 1979 in respect of imported kits and cylinders and that it is not involved in manufacturing process.
2. Since facts of the case have been reproduced by the learned Judicial Member, therefore, the same are not repeated. The main focus of the learned Judicial Member is on the word "manufacturing" and the judgment of ITAT reported as 1999 PTD 793. Various definitions given by him in support of his point of view, in my opinion, in fact support the contention of assessee that a complicated process is involved in conversion of normal natural gas to compressed gas as it completely changes the physical and chemical nature of the gas and kits and when cylinders are put together, anew object is made out of them. This process is essential for converting one energy system to another, which would not have been possible if each individual part is utilized independently. The process of conversion from petrol to gas and conversion of natural-gas to CNG has been explained in detail before the learned CIT(A) as well as before us, which has not been considered by the learned Judicial Member.
3. As mentioned earlier, the learned Judicial Member has relied upon a case reported as (1999) PTD 793, which has no relevance to the 'case in hand for the following reasons:--
(1) In the cited case LPG (Liquid Petroleum Gas) purchased from OGDC in big containers, was sold as such to the customers in original shape in cylinders of 11 kgs; whereas in the instant case kits and cylinders as such were not sold to customers but were sold and fixed in vehicles by technical staff in its premises and that without this exercise it would not have been possible to use natural gas for purpose of driving motor vehicles. In other words, in assessee's case the main plant and machinery converts natural gas into compressed gas; whereas the engine conversion enables the vehicle to consume the compressed natural gas in order to drive the vehicle.
(2) That in the above cited case LPG remains LPG even if it is sold to customers and there is no change in form and contents; whereas in the case of, assessee kits and cylinders loose their distinction and become part and parcel of CNG with additional characteristics and functions.
(3) That in the cited case the issue before the Tribunal was exemption under clause 118-C of the Second Schedule to repealed Ordinance, 1979 wherein in sub-clause (d) of the said clause, the legislature has laid down the condition that the industrial undertaking has to be "engaged in manufacturing"; whereas in section 80C(2)(a)(ii) the legislature has intentionally used the word "own consumption".
4. It is pertinent to mention that the main issue is as to whether or not tax withheld under section 50(5) in respect of kits and cylinders at the import stage is final discharge of liability under section 80C of the repealed Ordinance, 1979. The contention of assessee's AR is that 'tax deducted under section 50(5) does not constitute final discharge of tax liability under section 80C in the case in hand. He vehemently argued that since assessee is not a commercial importer, therefore, Circular No.12 of 1991 does not apply to it and has wrongly been applied by the Assessing Officer. The AR draw our attention to sub-para (b) of para(1) of the said Circular which reads as under:--
(1) These provisions would apply to the following two types of amounts, which have been deemed to be income of the recipient.
(a) ----------------------
(b) The amount as computed for the purpose of collection of tax under subsection (5) of section 50 in respect of goods imported, other than goods imported by Industrial undertaking as raw-material for its own consumption.
5. I consider it appropriate to emphasize that the word "manufacturing" has not been mentioned in section 80C(2)(a)(ii), which reads as under:--
80C(2) The amount referred to in subsection (1) shall be the following namely:--
Where the person is a resident,--
(i) ------------
(ii) the amount is computed for the purpose of collection of tax under subsection (5) of section 50 in respect of goods imported not being goods imported by an industrial undertaking as raw material for its own consumption.
6. The terms "industrial undertaking" and "own consumption" have been discussed at length in the order of learned CIT(A), which again have not been appreciated by the learned Judicial Member.
7. It is worth-mentioning that apart from legal terminology the Ministry of Petroleum and Natural Resources, Government of Pakistan vide is letter, dated 17-1-2003, debars assessee from sale of kits and cylinders in the open market by imposing the following main restrictions:--
(i) "You will strictly observe that all CNG conversions are done in your own workshop within the premises of your station or any other location approved by the authority, and not other party will undertaken conversion on your behalf.
(ii) You will maintain complete record of the CNG cylinders, its imported/purchased and fitted in the vehicles in your workshop and submit copies of the same to the authority on monthly basis.
(iii) You will issue a certificate for every vehicle converted to CNG indicating make and number of the cylinder and kit fitted stating that all equipment fitted meets safely standards as specified by the Authority."
8. That assessee is an industrial undertaking is evident from the "industrial tariff" applied by WAPDA and this is the first condition for falling out/exclusion from the regime of section 80C.
9. Also, C.B.R clarification vide C. No.1(42)WHT/2000, dated 30-6-2001, which is reproduced below, leaves no doubt that assessee which is a CNG Filling Station does not fall within the ambit of Presumptive Tax Regime;
To
Messrs Zahid and Associates,
N-67 Waris Khan Chowk,
Muree Road, Rawalpindi.
Subject: CLARIFICATION REGARDING ADJUSTMENT OF TAX DEDUCTED UNDER SECTION 50(5) ON CNG EQUIPMENTS.
I am directed to refer to your letter No. dated 2-6-2001 on the above subject and to confirm that the CNG equipment imported by a CNG filling station do not fall in the ambit of presumptive tax regime provided that equipment will only be used by the importers at their own CNG filling stations. Credit for the tax collected under section 50(5) is liable to be given against the tax liability of such importers including section 54 of the Income Tax Ordinance, 1979.
(Sd.)
(Muhammad Riaz)
Secretary (Withholding Tax).
9. In view of the forgoing discussion, I have no hesitation to hold that the instant case does not fall under the purview of section 80C F because conditions laid down in section 80C(2)(a)(ii) of the repealed Ordinance, 1979 are fulfilled as assessee is an industrial undertaking and kits and cylinders imported by its are utilized for own consumption.
As there is a difference of opinion between the learned Judicial Member and learned Accountant Member of the present Bench, hence by mutual consent the following questions are framed for opinion of third Member of the Tribunal:---
(1) Whether on the facts and in the circumstances of the case any material/substance without undergoing any change in farm and substance would amount as raw material consumed?
(2) Whether the imported .equipments by an industrial undertaking generating profit in terms of sale would fall outside the Presumptive Tax Regime?
(3) Whether without involvement of manufacturing or processing of manufacturing any substance could be consumed as raw material for consumption?
(4) Whether the sale of gas kits in original condition as shown in trading account would amount a raw material consumed by an industrial undertaking for its own consumption?
(5) Whether an "Industrial Undertaking" as mentioned in section 80C(2)(a)(ii) is necessarily required to be carrying on manufacturing or manufacturing process?
(6) Whether assessee, being engaged in the purification, processing of natural gas, conversion thereof into compressed natural gas, its storing and supplying in the conversion of petrol motor vehicle engine into CNG consumption engine is carrying on manufacturing or manufacturing process?
The case record may be sent to the Hon'ble Chairperson with the request to entrust the. case to a third Member of the Tribunal for his opinion.
KHAWAJA FAROOQ SAEED, CHAIRPERSON, CONCLD.---The case has come to me as a third Member and I have heard the same as a referee for the difference of opinion between two learned Members of the ITAT. Learned A.M. has declared the process of the assessee business as manufacturing while learned J.M. has considered the process to be a trading transaction by holding that the process is not covered within the definition of manufacturing. Before, I move on to my part of discussion it will be worthwhile if the facts of the case are re-capitulated.
For the assessment year 2000-2001 the CIT(A), has held the process to be as manufacturing while for the assessment year 2001-2002 he has considered ,the process to be as covered within presumptive tax regime by holding that it is not manufacturing.
The assessee is deriving income from a Gas filling station and from running of workshop where the petrol engines are converted to enable .them to function with CNG also in addition to the petrol. The learned Members have agreed on most of the issues involved, however, the disagreement is regarding the process of conversion of the engine to CNG engine only. The main question, therefore, is as to whether the assessee is a manufacturer or not and that whether he is entitled to opt for his assessment as a manufacturer or not. The questions posed, however; are as follows:--
(i) Whether on the facts and in the circumstances of the case any material/substance without undergoing any change to form new substance would amount as raw material consumed?
(ii) Whether the imported equipment by an industrial undertaking generating profit in terms of sale would fall outside the Presumptive Tax Regime?
(iii) Whether without involvement of manufacturing or process of manufacturing any substance could be consumed as raw martial for consumption?
(iv) Whether an "Industrial Undertaking" as mentioned in section 80C(2)(a)(ii) is necessarily required to be carrying on manufacturing or manufacturing process?
(v) Whether assessee, being engaged in the purification, processing of natural gas, conversion thereof into compressed natural gas, its storing and supplying and in the conversion of petrol motor vehicle engine into CNG consumption engine is carrying on manufacturing or manufacturing process?
Before moving on to further discussion it will be relevant if provision of section 80C(2)(a)(ii) is reproduced:--
"the amount as computed for the purpose of collection of tax under subsection (5) of section 50 in respect of goods imported, not being goods imported by an industrial undertaking as raw material for its own .consumption. "
From the above provision the requirement for assessment under section 80C is that tax deduction on import stage under section 50(5) in respect of goods imported is covered under the Presumptive Tax Regime and is to be treated as full and final decision. The exception, however, is in respect of the industrial undertaking that consumes the raw material for its own use. So the basic ingredient which can decide the issue is as to whether the machinery imported by the, assessee forms a raw material and that it is .consumed by him for his own production besides whether the assessee forms the shape of an industrial undertaking or not. These two issues shall decide all questions posed by my colleagues.
This is now settled law that where the terms are defined within the law itself one need not go into the other definitions and where the law appears to be silent obviously ordinary dictionary meaning has always .been considered as the best guide. There are exceptions to the rule of ordinary dictionary meanings also. However, the same shall be discussed in the later part of this order if need arises.
First of all let us see as to what is an `industrial manufacturing'. Learned A. R. has already provided some definitions which are mentioned at page 6 of the order. It includes a process which result is in a different shape than the input. Such a manufacturing process may be by use of hands or may involve machinery. It can also be with the involvement of both of the above elements. However, involvement of manpower/labour is the most important requirement.' If one goes to the ordinary meanings after going through definitions as are mentioned in the other it becomes apparent that the basic requirement to declare an item as manufacturing by some one is the change in the shape of the goods and its utilization other than its original shape and requirement. For example making of an envelope from ordinary paper is a manufacturing process though process involved is very simple and it requires glue and labour only for changing the paper into an envelope. Considering above example if we look into the case under discussion, the item which is imported is a CNG Kit which even if comes into a formal shape ordinarily has to go through a process of assembling again. The present assessee appears to be successful in convincing the learned two Members that he is not directly trading the machinery which is being imported by him. He is using it by himself by installing the same in the petrol car engines which later converts it into a Compressed Natural Gas (CNG) engine. One may agree at this stage that the change in the said form of engine by way of new adjustments does create the impression that there is a change in the working of the engine also. It means a different shape of the, output from the two inputs. One input is the already existing engine and the other is the attachment that convents the petrol, engine to CNG engine. So the outcome obviously is the one which is different from the two necessary inputs. This new attachment is not just simply placed but requires-quite a few changes before the same is affixed therein. A lot of nuts and bolts are added which definitely makes the process at least that of assembling it not formal manufacturing process, which the learned J.M. thinks is not existing in the case under discussion. Coming to the real controversy we should go to the relevant provisions again. Section 80C(2)(a)(ii) while treating tax charged on import of `raw material' as full and final discharge has provided an exception in the following language:--
"not being goods imported by an industrial undertaking as raw material for its own consumption. "
The term `industrial undertaking' means an organization which is working as an `industry' which connotation has normally been understood for the bigger projects. However, the use of term small industry and cottage industry had given it the meanings which covers even a process of the smallest form. One person alone involved in some manufacturing process can, therefore, also be considered as running an industry if he is using some input for conversion into some other shape for making it a vendible product. However, all these discussions in favour of the assessee process does not help him to be out of the Presumptive Tax Regime. Both my brother and. sister have used their energy for defining the term "manufacture" for which even process like this can definitely be included. However, the exception is provided in the language mentioned by me now as above. It is on import of raw material and its use for own consumption which provides exception. The assessee is an industrial undertaking and it is involved in the manufacturing process but whether its input is a raw material or not would need further discussion.
`Raw' means something in natural shape in crude form having never been brought to any change through any manual or mechanical process. The term does not need any long dilation; however, reference to some dictionaries is of relevance:
As per Chambers 20th Century Dictionary:
Raw therefore, means not altered from its natural state, not cooked or dressed; unwrought; not prepared or manufactured ;not refined; not correct not mixed; having the skin abraded or removed (also fig) showing through the skin (Spens); hard, harsh, cruel; untrained; out of condition (Spens) red and inflamed; immature; inexperienced; chilly and damp; narked-n, (with the) a skinned; sore, or sensitive place (usu, with on); that which is raw,-[adj]. Ra ish.
As per Black's Law Dictionary.
From the above definitions the obvious meaning that can be attached to `raw material' is, these items which are in its natural and crude form and are to be used for initiating anew manufacturing process. I adopt the above definition because of the golden principle interpretation of `not going beyond the intendments of law'. It does not need any reference, however, for the one who may require following case-law is quoted:--
Coming back to the present case where a machinery is added to already existing machines as an attachment which has already gone through many processes of high tech industries can it be called as raw material would not require a lot of discussion to answer. The items imported are highly technical already manufactured very advanced machinery. Its further attachment as already mentioned, not being a raw material cannot help in getting exemption from Presumptive Tax Regime. The import made by this assessee under section 50(5) therefore, is not a raw material imported for consumption, hence is full and final discharge.
My agreement on other points with learned A.M. with regard to its being a manufacturing as well as an industrial undertaking shall practically be of no help to the assessee. It is; therefore, held that the import made under section 50(5) in the case of this assessee is full and' final discharge of income as he is not consuming any raw material in his own manufacturing process: I have decided above-issue by recording my agreement with learned J.M. for the reason of the definition of the term `raw material'. Another angle, which may also not go to favour the assessee, is the .utilization of the same in terms of own consumption. However, since I have already decided the issue this term shall be discussed in some other case.
The result is obvious; the process through manufacturing the assessee is still not entitled to the option for the assessment under normal law. His import is taxable under presumptive tax regime and tax deducted in his case is full and final discharge.
C.M.A./102/Tax (Trib.)Order accordingly.