AL-TECHNIQUE CORPORATION OF PAKISTAN LTD. VS ADDITIONAL COLLECTOR ADJUDICATION, SALES TAX, ISLAMABAD, 2009 PTD-ISLAMABAD 1702 (2009)

Sales Tax Act (VII of 1990)---

----Ss.2(16)(17)(33) & 3---Gamma sterilization of medical/surgical products through radiation by petitioner for pharmaceutical companies on payment of sterilization charges---Plea of Revenue that such activity of petitioner was manufacturing and its unit was manufacturer, thus, liable to pay sales tax on such receipts---Validity---Sales tax could be levied on value of taxable supplies or goods imported into Pakistan---Petitioner received medical products from their manufacturers and after passing through process of sterilization returned same to manufacturers---Petitioner charged sterilization charges from manufacturers---Medical products after going through process of sterilization were not converted into another distinct article or product nor were so changed, transformed or reshaped becoming capable, of being put to use differently or distinctly---Process of sterilization would not fall within definition of `manufacture'---Such activity was neither a sale nor lease nor disposition of goods nor a supply nor petitioner was a manufacturer---Levy of sales tax on such activity under S.3 of Sales Tax Act, 1990 would depend upon taxable supplies made in furtherance of taxable activity.

Messrs AMIE Investment (Pvt.) Ltd. v. Additional Collector and others 2006 PTD 1459 and Ramna Fitting and Pipe Industry v. The Collector of Sales Tax 2002 PTD 470 rel.

Syed Tauqeer Bokhari for Petitioner.

Rizwan Akhtar Awan for Respondents.

Date of hearing: 3rd June, 2009.

JUDGMENT

MUHAMMAD MUNIR PERACHA, J.---During the course of audit of the records of the petitioner, by the Collectorate of Sales Tax, Rawalpindi, from the period 1998-99 to 2000-2001, the following irregularities were discovered:--

(i) "Messrs Al-Technique Corporation of Pakistan (Pvt.) Limited, Islamabad are mainly involved in irradiation, i.e. Gamma Sterilization, of medical/surgical products (syringes etc.) since 1987, in terms of provisions of section 2(16) of the Sales Tax Act, 1990 this activity is "manufacture" and status of unit as per the provisions of section 2(17) of the Sales Tax Act, 1990 is of "manufacturer" but unit didn't get sales tax registration on achieving prescribed turnover limit thus contravened, the provisions of section 14 of the Sales Tax Act, 1990 which is punishable under section 33(3)(a) of the Sales Tax Act, 1990.

(ii) Unit is providing gamma sterilization facility of surgical items to pharmaceutical companies since, 1987. Unit considering it as service but in terms of the provisions of section 2(16) and 2(17) of the Sales Tax Act, 1990 this activity of unit is "manufacture" and unit is a "manufacturer" so liable to pay sales tax on these receipts but unit has not paid sales tax amounting to Rs.6,452,095 on these receipts during the period 1998-99 to 2000-2001, thus contravened the provisions of section 3 and 7 of the Sales Tax Act, 1990 which is punishable under section 33(2)(cc) of the Sales Tax Act, 1990 and amount is recoverable along with penalty and additional tax under sections 33 and 34 of the Sales Tax Act, 1990.

(iii) Unit introduced its own sterilized syringes in 1998 and got sales tax registration on 14-124999. Total liability of sales tax of this activity, up to June, 2001, was Rs.1,483,943 but unit paid Rs.573,664 and short paid Rs.910,279 during the period 8/1998 to 6-2001 thus contravened the provisions of section 3 and 7 of the Sales Tax Act, 1990 which is punishable under section 33(2)(cc) of the Sales Tax Act, 1990, said amount is recoverable along with penalty and additional tax under sections 33 and 34 of the Sales Tax Act, 1990."

2. A show-cause notice was issued to the petitioner on 14-7-2003, calling upon it to show-cause as to why the evaded amount of sales tax along with additional tax under section 34 of the Sales Tax Act, 1990 should not be recovered from it and why it should not be penalized under section 33 of the Act.

3. The Adjudicating Officer, vide order in original No. 10 of 2004, dated 29-6-2004, directed the petitioner:--

"I therefore, direct to deposit an amount of Rs.3,762,374 as sales tax under section 36(1) of the Sales Tax Act, 1990 along with additional tax under section 34 of the Sales Tax Act, 1990 (which will be calculated by the appropriate officer of the Collectorate of Sales Tax and Central Excise, Rawalpindi at the time of final payment) and penalties @ 3% of the amount of the tax involved under section 33(2)(cc) and 5% of the amount of the tax involved under section 33(3)(a) respectively of the Sales Tax Act, 1990."

4. The petitioner challenged the Order-in-Original before the Appellate Tribunal. Member Technical vide judgment, dated 6-7-2007 came to the conclusion that the process of sterilization done by the petitioner falls within the definition of "manufacture". However, the learned member Judicial did not agree with the Member Technical, vide judgment, dated 4-8-2007. The Chairman of the Tribunal, therefore, referred the matter to a third Member, who agreed with the Member Technical, vide judgment, dated 5-1-2009. The petitioner, therefore, approached this Court through the present reference. The petitioner has proposed the following questions of law, which according to him arise from the judgment of the Tribunal.

(i) Whether the learned Customs, Sales Tax and Federal Excise Appellate Tribunal Islamabad Bench erred in holding that the effect of sterilization through radiation made by the appellant to the Pharmaceutical companies is chargeable to Sales Tax under section 3 read with sections 2(16), 2(17), 2(33) and 2(41) of the sales Tax Act, 1990?

(ii) Whether the process of gamma sterilization which does not affect the structure or appearance of the product and no addition, alternation, change, transformation or conversion etc. takes place falls under the definition of manufacture under section 2(16) of the Sales Tax Act, 1990?

(iii) Whether bare perusal of first part of section 3 of Act confirms that payment and levy of sales tax is contingent upon taxable supply made in furtherance of taxable activity?

5. We have heard the learned counsel for the petitioner as well as the Department and have gone through the record of the case.

6. Section 3 of the Sales Tax Act, provides that sales tax at the rate of 15% of the value of taxable, supplies made by a registered person in the course of furtherance of any taxable activity carried on by him and on value of goods imported into Pakistan shall be charged, levied and paid. Taxable supplies have been defined in section 2(41) of .the Sales Tax Act:

"Taxation Supply" means a supply of taxable goods made by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4".

"Supply" has been defined under section 2(33) of the Ordinance:--

"Supply" includes sale, lease or other disposition of goods carried out for consideration and also includes:--

(a) Putting to private, business or non-business use of goods acquired, produced or manufactured in the course of business;

(b) auction or disposal of goods to satisfy a debt owed by a person; (and)

(c) possession of taxable goods held immediately before a person ceases to be a registered person;

Manufacturer or producer is defined in clause 17 of section 2 to mean:--

"manufacturer" or "producer" means a person who engages, whether exclusively or not, in the production or manufacture of goods whether or not the raw material of which the goods are produced or manufactured are owned by him; and shall include:

(a) a person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepares goods by any other manner;

(b) an assignee or trustee in bankruptcy, liquidator, executor, or curator, or any manufacturer, or producer and any person who disposes of his assets in any fiduciary capacity; and

(c) any person, firm or company which owns, holds, claims or uses any patents, proprietary, or their right to goods being manufactured, whether in his or its name, or on his or its behalf, as the case may be, whether or not such person, firm or company sells, distributes, consigns, or otherwise disposes of goods.

"Manufacture" or "Produce has been defined in section 2(16): "Manufacture" or "Produce" includes:

(a) any process in which an article singly or in combination with other articles, materials, components, is either converted into another distinct article or product or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process incidental or ancillary to the completion of a manufactured product;

(b) Process of printing, publishing, lithography and engraving; and

(c) Process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner."

7. The charging section is section 3. The sales tax is leviable either on the value of the taxable supplies or on the value of the goods imported into Pakistan. For falling in the definition of taxable supply, it is essential that it must fall within the definition of supply. The definition of supply has already been given in paragraph 6 of the judgment. Let us first examine whether the activity carried on by the petitioner company is supply within the meaning of section 2(33) of the Sales Tax Act, 1990. The petitioner receives the medical products from their manufacturers and after passing those through the process of sterilization returns the same to the manufacturers. The petitioner charges the sterilization charges from the manufacturers. The transaction is neither a sale nor lease nor disposition of goods. In case reported as "Messrs Amie Investment (Pvt.) Ltd. v. Additional Collector and others, (2006 PTD 1459)", the question was examined by a division bench of the High Court of Karachi. In the precedent case, the assessee was engaged in the business of receiving ship plates from principal, converting them into M.S. twisted Bars and returning such bars to principal on payment of conversion charges. The division bench of the High Court of Karachi after surveying the case-law on the subject, recorded a finding that such a transaction is neither sale nor the lease, nor disposition of goods and is not covered by the definition of "supply".

8. The process of sterilization does not fall within the definition of manufacture. After going through the process of sterilization, the medical products are not converted into another distinct article or product nor those are so changed, transformed or reshaped that those become capable of being put to use differently or distinctly. In this respect reliance can be placed on case reported as "Ramna Fitting and Pipe Industry v. The Collector of Sales Tax 2002 PTD 470.

9. In view of what has been said above, we are of the opinion that the transaction between the petitioner and the manufacturer of medical products is neither a supply nor the petitioner is a manufacturer within the meaning of the Sales Tax Act, 1990. We, therefore, answer question No.(i) in the positive, question No.(ii) in the negative and question No. (iii) in the positive. Sales Tax Reference is disposed of in the above terms.

S.A.K./A-216/IslReference disposed of.