MOLASSES TRADING AND EXPORT CO. (PVT.) LIMITED VS GOVERNMENT OF PAKISTAN and others, 2007 PTD-KARACHI-HIGH-COURT-SINDH 1005 (2007)

Customs Act (IV of 1969)---

----Ss.18 & 31-A---Constitution of Pakistan (1973), Arts.199, 18 & 23---Constitutional petition---Petitioners, who were commercial importers, after obtaining import licence, placed orders for import of 2300 metric tons of edible oil from abroad and letters of credit were established on 24-3-1986 for 2000 metric tons and on 1-4-1986 for the remaining 300 metric tons---Said edible oil, at that time, was on free list under the Import Policy Order and no customs duty was leviable, however, before the goods arrived at the Port, authorities imposed regulatory duty on the said oil at the rate of Rs.3000 per metric ton under notification dated 7-4-1986 and through a subsequent notification, rate of duty was reduced to Rs.2350 per metric ton---Petitioner, called in question the levy of duty and contended that the levy was hit by Arts.18 & 23 of the Constitution and that in circumstances, the petitioner was unable to pass the burden of tax to consumers in new market conditions of the imported commodity---Question therefore, arose as to whether the inability of the petitioner to pass on the burden of customs duty only on account of market conditions and not because of any further restrictions imposed by the government, was sufficient to hold the tax to be confiscatory in nature---Held, no vested right was created in favour of petitioner having entered into a contract prior to levy of duty to claim exemption from such duty---Very concept of regulatory duty leviable under S.18(2), Customs Act, 1969 was a power delegated to the executive to levy additional customs duty in the wake of a fluctuating market, it was at times levied to protect the domestic industry as against free inflow of foreign goods---Fact of the petitioner's inability to market imported goods could possibly be treated as normal loss incidental to any kind of business or trading activity---All that Article 18 of the Constitution guaranteed was the freedom to carry on lawful trade subject to the power to regulate it in the interest of free competition---State was not obliged to assure every person undertaking any business a particular margin of profit as profits and losses were the normal incidents of business in a market economy---If the petitioner was unable to pass on the burden of indirect taxes upon consumers for some time he could only blame himself for such omission---Losses stated to have been sustained were incidents of risk, which every businessman takes and the measures of duty levied could in no sense be treated as confiscatory or expropriatory---Principles---Constitutional petitions were dismissed in circumstances.

Al-Samrez Enterprises v. Federation of Pakistan 1986 SCMR 1917; Government of Pakistan v. Muhammad Ashraf and others PLD 1993 SC 176; Dewan Sugar Mills v. Union of India AIR 1959 SC 626; K.T. Moopil Nair v. State of Kerala AIR 1961 SC 552; Tata Iron Steel Company v. State of Behar AIR 1958 SC 452; Jagan Nath v. State of U.P. AIR 1962 SC 1563; Express Newspaper v. Union of India AIR 1986 SC 515; Dev Kumarsingji v. State of Madiah Paradesh AIR 1967 M.P. 268; Corporation of Calcutta v. Liberty Cinema AIR 1965 SC 1107; Attorney General of Alberta v. Attorney General of Canada AIR 1939 PC 53; Alaska Fish Sold Inn and Buy Products Company v. Smith (255 US 48); A. Magnano v. Hamilton (292 US 40); Folks v. Stander Oil Company (294 US 87) and Illahi Cotton Mills, v. Federation of Pakistan PLD 1997 SC 582 ref.

Khalid Anwar, Dr. Farogh Naseem and Abdul Sattar Osman for Petitioners.

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

Dates of hearing: 16th December, 2005 and 12th February, 2007.

JUDGMENT

SABIHUDDIN AHMAD, C.J.---All these petitions seem to be premised on similar facts and the same question of law and are being disposed of through a common judgment. It may not even be necessary to refer to the facts of each case and for the purposes of appreciating the genesis of the controversy one may refer to those of C.P. No.D-431/1986, upon which Dr. Farogh Naseem, learned counsel mainly argued the case on behalf of the petitioners. The petitioner, who is a commercial importer, after obtaining Import Licence placed orders for import of 2300 Metric Tons of edible vegetable oil from Argentina and letters of credits were established on 24-3-1986 for 2000 metric tons and on 1-4-1986 for the remaining 300 metric tons. At that time, Soyabean oil was on free list under the Import Policy Order and no customs duty was leviable. However, before the goods arrived at Karachi, the respondent No.1 imposed regulatory duty on such oil at the rate of Rs.3,000 per metric ton under Notification dated 7-4-1986. Through a subsequent Notification dated 17-4-1986, however, the rate of duty was reduced to Rs.2350 per metric ton.

2. The petitioner nevertheless called in question the levy of duty through this petition which came to be heard along with several other petitions of similar nature and was allowed by judgment, dated 16-11-1987 on the principle that the duty levied under the two notifications could not affect vested rights created through an earlier establishment of letters of credit following the principle of law laid down by the Honourable Supreme Court in Al-Samrez Enterprises v. Federation of Pakistan 1986 SCMR 1917.

3. The Federal Government preferred an appeal against the aforesaid judgment, which was partly allowed by judgment dated 7th October, 1991, reported as Government of Pakistan v. Muhammad Ashraf and others PLD 1993 SC 176. Their lordships reiterated the, view taken in several other precedents that section 31-A of the Customs Act had effectively wiped out the principle of law declared in Al-Samrez case (1986 SCMR 1917) and that too with retrospective effect except in respect of past and closed transactions. They further held that the petitioners' plea as to absence of power to levy regulatory duty under section 18(2) was untenable inasmuch as abstention from exercising the delegated legislative power to impose such duty under section 18 at a given time or at the commencement of the financial year did not create any vested right in favour of a party having entered into a contract prior to levy of duty to claim exemption from such duty.

4. Nevertheless, their lordships were inclined to accept a third plea urged on behalf of the petitioners to the effect that the levy in question was constitutionally invalid insofar that it impaired the petitioners fundamental right to carry on a lawful business guaranteed by Article 18 and to hold and acquire property or not to be deprived of property without compensation under Articles 23 and 24 of the Constitution. It was urged that a tax was expropriatory confiscatory in nature or attempted to destroy the business of person's tax, it was liable to be declared constitutionally invalid. Considering that this aspect of the matter had not been considered by the High Court, their lordships remanded the case to this Court to decide the question whether the impugned notifications imposed confiscatory levies in violation of the fundamental rights guaranteed by Articles 18 and 23 of the Constitution.

5. The view that very high rates of taxation which are disproportionate to the actual earnings or earning capacities and tend to destroy a taxpayer are confiscatory and liable to be declared constitutionally invalid has been reiterated as pointed out by Dr. Farogh Naseem in para. 44 of the subsequent judgment of the Honourable Supreme Court in Illahi Cotton Mills v. Federation of Pakistan as well as other pronouncements of the Supreme Court of India and other foreign jurisdictions. Nevertheless what needs to be considered are the parameters upon which the question whether a particular tax is confiscatory or otherwise requires to be determined. In this context, the factual data placed on the record showing the impact of the tax and the principle upon which they could be considered confiscatory require examination. At the outset, Dr. Farogh Naseem argued that the right to carry on a lawful trade or business entail in itself the right to at least make reasonable amount of profit out of such trade or business and a measure by the State requiring a businessman to sell goods at a loss would offend the constitutional protection. In this context, he relied upon the observations of the Supreme Court of India in Dewan Sugar Mills v. Union of India AIR 1959 SC 626, where a price fixation measure was attacked on the ground that it compelled factories to sell sugar at a loss but the plea was repelled upon a specific finding to the effect that prices could be fixed only after ensuring a reasonable margin of profit for the producers.

6. Laying down the factual matrix of his case, Dr. Farogh Naseem argued that the total cost for a quantity of about 2300 metric tons worked out (excluding regulatory customs duty) to Rs.17,819,000 over which such duty in the sum of Rs.4,418,000 was claimed. As such, the cost per maund (inclusive of duty) amounted to Rs.360 per maund. At the same tune he relied upon certain market bulletins indicating the local market prices of commodities in 1986 showing that the price of Soybean Oil from USA remained more or less constant before and after the imposition of regulatory duty. In fact, the chart presented by him reflects the rate of Rs.340 per maund before the imposition of duty and Rs.325 by the end of the year. Learned counsel argued that, in the circumstances, the petitioner was unable to pass the burden of tax to consumers in view of the market conditions.

7. Without entering the controversy as regards the veracity of the factual data placed on record by learned counsel, what needs to be considered is whether the inability of the petitioner to pass on the burden of the Customs Duty only on account of market conditions and not because of any further restrictions imposed by the Government was sufficient to hold the tax to be confiscatory in nature. Indeed, Dr. Farogh Naseem argued with a great deal of emphasis that only because of the incidence of taxation the goods imported by the petitioner had to be sold at a loss. Nevertheless another way of looking at the matter could surely he that the, goods imported by the petitioner could not find their way in the market on account of cheaper alternatives available. Incidentally the very concept of regulatory duty leviable under section 18(2) seems to be a power delegated to the executive to levy additional customs duty in the wake of a fluctuating market. It is at times levied to protect the domestic industry as against free inflow of foreign goods. The fact of the petitioner's inability to market imported goods could possibly be treated as normal loss incidental to any kind of business or trading activity.

8. Though the principle that a tax which is confiscatory in nature is liable to be struck down as unconstitutional has been recognized by our Supreme Court, we are not aware of any reported case where a particular tax was actually found to be confiscatory or where the principles for determining whether a particular levy is confiscatory have been clearly spelt out. Therefore, guidance needs to be sought from foreign precedents. Dr. Farogh Naseem simply urged that the mere fact that after payment of tax the petitioner was compelled to sell his goods at a loss by itself would render the tax/duty unconstitutional. Learned counsel for the respondents, on the other hand, were not able to provide much assistance on this aspect of the matter. We, therefore, requested Mr. Faisal Siddiqui and Ms. Wajeeha Mehdi, Advocates, to assist us with some foreign case-law.

9. Mr. Faisal Siddiqui brought to our notice certain judgments from the Supreme Court of India in K.T. Moopil Nair v. State of Kerala AIR 1961 SC 552 the Travancore Cochin Land Tax Act, 1955 was held to be confiscatory and constitutionally invalid where owner of forest land through a permit from Deputy Commissioner enabled him to derive an income of about Rs.3,000 and the tax levied at the flat rate of Rs.2 per acre made him liable to pay Rs.50,000 by way of tax. In Tata Iron Steel Company v. State of Behar AIR 1958 SC 452, however, their lordships held that a sales tax did not cease to remain so even if the seller was unable to pass the burden of the tax to the consumer. In Jagan Nath v. State of U.P. AIR 1962 SC 1563 it was held that merely because the rate of tax was unreasonably high was not sufficient to make the statute levying it liable to be struck down. In Indian Express Newspaper v. Union of India AIR 1986 SC '515 Customs duty on import of news print was questioned on the ground of being violative of fundamental right to freedom of press guaranteed by the Constitution. The Court held that freedom of the press had to be respected and at the same time taxes had to be levied for support of the Government. Accordingly it was the duty of the Court to strike a delicate balance between the two important requirements of public interest. Nevertheless, their lordships also made it clear that the above principle would not apply to other taxation measures which could be struck down only if they were openly confiscatory or a colourable devise to confiscate. It was observed that a taxation measure may be questioned on the ground of being repugnant to fundamental rights guaranteed by the Constitution' but not merely because it was unreasonable or had not taken into account circumstances which the Court considered relevant.

10. Ms. Wajiha Mehdi, who carried a somewhat extensive research at our request also referred to the pronouncement of the Division Bench of the Madiah Paradesh High Court in Dev Kumarsingji v. State of Madiah Paradesh AIR 1967 M.P. 268, whereafter relying upon certain precedents from the Supreme Court and the Privy Council, it was held that a tax could be declared invalid if its magnitude was such as to eliminate the owner or to compel him to part with the taxed property for payment of the tax assessed or if it destroyed his business. In Corporation of Calcutta v. Liberty Cinema AIR 1965 SC 1107, the respondent had successfully questioned the increase of licence fee imposed by the appellant on Cinema houses from Rs.400 to Rs.6000 before the High Court. The Supreme Court held that though the 1500% increase was very high the practical effect would be that the respondent would be required to pay licence fee at the rate of Rs.5 per show, which could not be considered confiscatory in any sense. The findings of the High Court were reversed and the validity of levy was upheld.

11. From the Canadian jurisdiction learned counsel referred to the following observations of the Lord Chancellor Manghun in Attorney General of Alberta Attorney General of Canada AIR 1939 PC 53:---

"It was rightly contended on behalf of the appellant that the Supreme Court and the Board have no concern with the wisdom of the legislature whose bill is attacked; and it was urged that it would be dangerous precedent to allow the views of the members of the Court to the serious consequences of excessive taxation on banks to lead to a conclusion when the Bill is ultra vires. But this argument would not prevail in a case where the taxation in a practical business sense is prohibited."

12. As regards the US in Alaska Fish Sold Inn and Buy Products Company v. Smith (255, US 48), A statute levying licence tax upon persons manufacturing fish oil was challenged on the ground that it would prohibit and confiscate the plaintiff hills. The Court went to the extent of the holding that "even if the tax should destroy a business it would not be invalid on that ground alone as those who enter a business take that risk." In A. Magnano v. Hamilton (292 US 40) their lordships reiterated that the mere fact of a tax being so extensive as would bring about the destruction of the appellants business was no ground for striking down the taxing law unless it could be shown that the measure, in substance and effect was not taken in the exercise of taxing power but amounted to a direct exertion of a forbidden power i.e. confiscation of property. In Folks v. Stander Oil Company (294 US 87) it was held that mere imposition of licence fee on graduated basis which would render the business in large chains of store unprofitable would not be sufficient for striking down the levy unless it was shown that taxing power had been exercised as a clog for confiscation of property.

13. Ms. Wajiha Mehdi also mentioned that State Supreme Courts in the U.S.A. have also been adopting a somewhat consistent standards in holding that:---

(i) There was a mark distinction between confiscatory taxation measures which entailed forfeiture of public property and unjust and unreasonable taxes and only the former and not the latter kinds of cases would render a measuring question unconstitutional. Otherwise the Courts were required to accord due reference to the wisdom of the legislature.

(ii) Only such taxation measures were held to be confiscatory and unconstitutional which tended to take away the property taxed, make it worthless or destroy his business.

(iii) Mere decrease in the market value or deprivations of profits at a particular point of time however, did not amount to confiscation of property.

(iv) The question whether a particular levy was confiscatory was basically one of fact and a heavy burden of proof lay upon the person alleging it.

14. Indeed we are conscious that Constitution of United States unlike ours does not contain guaranteed fundamental right to carry on a lawful trade and the Honourable Supreme Court has observed in Illahi Cotton Mills v. Federation of Pakistan PLD 1997 SC 582 that legislation whereby prices of marketable commodities which fixed in such a way as to force manufacturers to sell them below the cost of production might offend Article 18. Nevertheless, it needs to be kept in view that all that Article 18 guarantees is the freedom to carry on lawful trade subject to the power to regulate it in the interest of free competition. Indeed the State may not impose restrictions or take measures which might prevent a citizen from carrying on such business. Nevertheless, there seems to be no obligation on the part of the State to assure every person undertaking any business a particular margin of profit and profits and losses are the normal incidents of business in a market economy. As stated above in case the petitioners were unable to pass on the burden of indirect taxes upon consumers for some time they could only blame their own luck.

15. Dr. Farogh Naseem was also unable to show that the levy of regulatory duty had the effect of compelling the petitioners to incur losses for a sustained period of time. On the contrary, he urged that the petitioner had imported the goods in question after calculating that such import would yield him a reasonable margin of profit, which was foiled by the sudden imposition of duty and, as such, the imposition was ultra vires. We are afraid, we are entirely unable to agree. Indeed the proposition might be sustainable on the principle laid' down in Al-Samrez case 1986 SCMR 1917 but has completely lost force upon the insertion of section 31-A of the Customs Act and several subsequent precedents of the Supreme Court, whereby those principles stood completely effaced. In precise terms, learned counsel only attempted to resurrect a legal proposition, which has completely lost effect through statutory intendment and subsequent case-law.

16. For the foregoing reasons, we are clearly of the opinion that the losses stated to have been sustained are incidents of risk, which every businessman takes and the measure of duty levied could in no sense be treated as confiscatory or expropriatory. All the petitions are, accordingly, dismissed with costs.

M.B.A./M-28/KPetitions dismissed.