PAKISTAN BEVERAGE LIMITED, KARACHI VS LARGE TAXPAYER UNIT (L.T.U.) through Chief Commissioner, Land Revenue, Karachi, 2010 PTD-KARACHI-HIGH-COURT-SINDH 2673 (2010)

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

----Ss.3(1)(b), 4, 7 & 47---Customs Rules, 2001, Chap.XII (7) & R.296(1)(f)---Duty and Tax Remission for Export Rules---Reference---Value Added Tax (VAT), levy of---Principles---Imports and exports of goods---Zero-rating---Duty and Tax Remission for Exports (DTRE)---Grievance of assessee was with regard to entitlement of input tax adjustment/refund in respect of sales tax paid on raw materials consumed in manufacturing/export of goods by assessee, whether under DTRE Scheme or otherwise---Validity---First point to keep in mind was that Sales Tax Act, 1990, currently in force was a value added tax or VAT-When sales tax was levied in VAT mode, it was charged at each stage in the supply chain as the goods move from point of origin to ultimate destination---At each stage, sales tax was paid on the value added by supplier concerned---Such was done by taking sales tax charged by supplier for the goods sold by him (known as output tax) and subtracting from it the sales tax paid by him for the goods purchased by him (known as input tax)---If difference (i.e. output tax minus input tax) was positive over the relevant tax period, i.e. the output tax was more than input tax, that meant that the supplier had to pay the difference to the State---If difference was negative (i.e. output tax was less than input tax), then supplier was entitled to a refund of such amount or its adjustment in the next tax period---In respect of each transaction, other than the first and the last, the sales tax involved had a dual characteristic---For the person making the supply (i.e. the seller) it was his output tax and for the person acquiring the goods (i.e. the buyer) it was his input tax and such were the two sides of the same transaction---In VAT, the output-input adjustment and payment of tax in terms thereof, was of the essence of the tax---Without such (or any equivalent) adjustment, the tax would simply cease to be a value added tax---In case of sales tax, the principle was given statutory effect in S.7 of Sales Tax Act, 1990, and the same was the basic provision of the statute---In supply chain that ended in goods being exported, the State might choose the stage most convenient to it to give effect to zero-rating---In most cases, it was at the end of supply chain i.e. at the stage of actual exporter but there was nothing preventing the State from choosing any prior stage in the supply chain and that was what had happened in the case of input goods supplied under DTRE Rules---Insofar as any other goods supplied to exporter were concerned, their position remained the same as before: the output-input adjustment resulting from zero-rating took place at the end of supply chain i.e. at the stage of actual export---Such position was not touched in the statute, there could be nothing in DTRE Rules that could detract or derogate from the same---Appellate Tribunal failing to keep the basic principle in mind ended up completely misreading and misapplying DTRE Rules, therefore, order passed by the Tribunal was wrong and could not be sustained---Reference was disposed of accordingly.?

Additional Collector, Sales Tax v. Associated Industries Ltd. 2009 PTD 1799; Great Sea Industries and others v. Federation of Pakistan and another C.P. No. 1684 of 2007; decided on 18-3-2009; Agro International (Pvt.) Ltd. v. Federation of Pakistan and another C.P. No. 2225 of 2008, decided on 11-3-2008; G.P. Singh, Principles of Statutory International, 9th Ed., 2004; Collector of Central Excise Jaipur v. Raghubar India Ltd. AIR 2000 SC 2027; Foleming (t/a Badycraft) v. HM Revenue and Customs (2009) UKHL 2; Metcash Trading Ltd. v. Commissioner of South African Revenue Service and another 2002 (4) SA 317; Value Added Tax A Comparative Approach by Alan Schenk and Oliver Oldman, 2007 and Benyon and Partners v. HM Commissioner of Customs and Excise (2004) UKHL 53 ref.

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

----Ss.3 (1)(b) & 4---Imports and exports of goods---Zero-rating---Imports are specifically under S. 3(1)(b) of Sales Tax Act, 1990, have been brought to tax, while exports are specifically and expressly zero rated by S. 4 of Sales Tax Act, 1990---Sales Tax Act, 1990, embodies a destination principle of value added tax (VAT)---Since zero rating of exports is a fundamental principle of VAT levied in such manner, therefore, it is an essential element of Sales Tax Act, 1990.?

Khalid Jawed Khan for Applicant.

Ali Mumtaz Sheikh for Respondent.

Date of hearing: 14th September, 2010.

JUDGMENT

MUNIB AKHTAR, J.---By means of the present, and connected, Sales Tax References, the Applicant challenged the common order of the Appellate Tribunal dated 13-4-2010, whereby the applicant's appeals against the order of the Collector (Appeals) were dismissed and as a result of which the orders-in-original passed against the applicant were upheld. The applicant had proposed the following five questions as being questions of law arising out of the impugned order:

(1)? Whether on the facts and circumstances of the case, the show-cause notice issued to the applicant was time-barred?

(2)? Whether on the facts and circumstances of the case the learned Tribunal and the forums below misinterpreted and misconstrued the provisions of the Sales Tax Act, 1990 and the D.T.R.E. Scheme?

(3)? Whether on the facts and circumstances of the case, the applicant was entitled to claim input tax adjustment/refund in respect of sales tax paid on the raw materials consumed in the manufacturing/export of goods by the applicant (whether under the DTRE scheme or otherwise)?

(4)? Whether the learned Tribunal and the fora below erred in law and discriminated against the applicant in refusing to apply the clarification dated 6-10-2005 issued by the Central Board of Revenue given in the case of Messrs Crescent Bahuman Limited to the case of the applicant?

(5)? Whether on the facts and circumstances of the case the orders passed by the learned Tribunal and - the fora below not sustainable in law?

2. At the hearing of the references, which were fixed for final disposal at the katcha peshi stage, Mr. Khalid Jawed Khan, learned counsel for the applicant, did not press the first question. At the conclusion of the hearing, we had, by means of a short order dated 31-8-2010 answered Question Nos. 2 and 3 in the affirmative, i.e., in favour of the applicant and against the respondent, and had also held that in view of these answers, it was not necessary to answer the remaining two questions. The following are the reasons for which we disposed of the references in the foregoing manner.

3. The applicant is a manufacturer of soft drinks, which are sold under various brand names, including internationally known trademarks such as Pepsi, 7Up, Mountain Dew and Miranda. The applicant exports a portion of its production, and the present references are concerned with an issue relating to the payment and adjustment of sales tax in relation to such exports. The Federal Board of Revenue ("F.B.R.") has, since 2001, made available a facility to enable exporters to acquire goods for the manufacture of exports without payment of federal taxes on the former. The scheme, known as Duty and Tax Remission for Exports ("DTRE") is part of the Customs Rules, 2001 ("2001 Rules"), and is contained in Sub-Chapter 7 of Chapter XII (Exports). (For. convenience, the rules which form part of this Sub-Chapter are herein after referred to as the "DTRE Rules"). The essential idea behind the DTRE Rules is that an exporter can get himself registered with the concerned Collector, and submit a list of the goods needed by him to manufacture the exports. (Such goods are defined as "input goods" under Rule 296(1)(f) and this term is used herein in the same sense as defined under the DTRE Rules). Once the application is approved, and subject to the procedures and conditions laid down in the DTRE Rules, the exporter is able to obtain the input goods (both imported and locally procured) without payment of customs duty, excise duty, sales tax and withholding income tax thereon.

4. The applicant was, and is, duly registered under the DTRE Rules. This meant, insofar as is presently relevant, that it could obtain the input goods as per the approved list without payment of any sales tax thereon. On this point, there is no dispute. However, in addition to such input goods, the applicant also used certain other (locally procured) goods on which sales tax was charged from it. In respect of the sales tax so charged, the applicant sought a refund/adjustment under the provisions of the Sales Tax Act, 1990. It is this refund/adjustment that is the contentious issue. The respondent department's case is that having opted for the DTRE scheme, the applicant is not entitled to claim any such refund/adjustment. The applicant on the other hand contends that in respect of goods purchased and used by it for the manufacture of exported goods, other than the "input goods" under the DTRE Rules, it is entitled to a refund/adjustment under the normal provisions of the Sales Tax Act. It is important to keep in mind that it is not in dispute that the sales tax in question was paid by the applicant in respect of goods that were acquired for purposes of the exported goods. It is also not in dispute that in the ordinary course, i.e., if the applicant had not been registered under the DTRE Rules, it would have been entitled to a suitable adjustment/refund. The controversy is only whether registration under the DTRE scheme disentitles the applicant in this regard.

5. Since different tax periods were involved, the applicant was served with several show-cause notices in respect of the adjustments made by it. The applicant contested the notices, but the Additional Collector (Adjudication) decided the matter against it. As noted above, the applicant preferred appeals to the Collector (Appeals) and the Tribunal, but those proceedings also met the same fate. While dismissing the appeals by means of the impugned order, the Tribunal, after referring to various provisions of the DTRE Rules, held as follows:

"From the perusal of above provisions it is clear that the entire scheme of DTRE is a scheme supervised by the Regulatory Collector to facilitate registered person under the Sales Tax Act, 1990 to obtain the goods termed as input goods not only without payment of Sales Tax but also without payment of customs duty, central excise duty and withholding income tax with a declaration of input/output ratio and wastage and entitlement of specific declared acquisition of duty free input goods declared by DTRE users at the time of seeking approval and subsequent export containing full detail and declaration in terms of Rule 306 of the DTRE scheme, for the purpose of verification of compliance of the provisions of the scheme. The DTRE scheme as appears from the relevant provisions of S.R.O. 450(I)/2001 and S.R.O. 563(I)/2005 read with DIRE Rules, is a facility granted to exporter to acquire the goods without payment of Sales Tax for use in the manufacture of goods to be exported strictly under supervision of regulatory Collector to avoid and possibility of misuse as against the export of taxable supplies governed by section 4 of Sales Tax Act, 1990 where goods are charged to Sales Tax at zero rate. Under the obtaining circumstances the appellant who have voluntarily opted for this scheme in respect of particular goods cannot turn around and seek adjustment of input tax under section 7 of Sales Tax Act, 1990 in respect of input goods which according to appellant were used in the export of goods under DTRE that too without declaration at the time of obtaining approval. No valid or justifiable explanation has been submitted for purchase of goods on payment of Sales Tax. This appears to be an afterthought which cannot be permitted specifically when taking benefit of beneficial provisions incorporated under this scheme, so it negates the fundamental principle of the interpretation that exemption of a tax or a benefit thereon in tax has to be strictly construed."

6. Before proceeding further, one preliminary point must be made in respect of the DTRE Rules. Sub-Chapter 7 of Chapter XII of the 2001. Rules, which contains the said rules, was substituted in its entirety in 2005 (by S.R.O. 563(I)/2005 dated 16-6-2005). We were informed that the tax periods involved in the present references predate this substitution. Therefore, reference to the DTRE Rules herein below is to the rules as they stood prior to the 2005 substitution, although we have, where possible, referred also to the relevant rules as they stand today.

7. Mr. Khalid Jawed Khan, learned counsel for the applicant, submitted that there was nothing in the DTRE Rules as would disentitle the applicant from claiming a refund/adjustment of input tax in respect of goods purchased for the production of exported goods, even though the former were not on the approved list of input goods. He submitted that the DTRE Rules could not override or control the express provisions of the Sales Tax Act, and referred in particular to sections 4 (zero rating of exports) and 7 (the output-input adjustment mechanism). He pointed out that there was no notification in the field under section 8 (which is considered below) which covered the goods purchased by the applicant. Thus, the applicant had the right to claim a refund or adjust the input tax paid by it on the goods in question, and this right had been wrongly denied by the respondent department by taking shelter behind the DTRE Rules. He submitted that in the post-substitution DTRE Rules, a new Rule 307B had been added, the proviso to which expressly limited refund of sales tax on the acquisition of tax paid input goods (other than electricity, gas and services) to 20% of the total value of the DTRE approval. His case was that there was no equivalent rule in the DTRE Rules as in force at the relevant time (i.e., prior to the 2005 substitution). The only rule possibly relevant at that time was Rule, 302A which provided as follows:--

"302A. Refund or adjustment of sales tax-Refund or input adjustment of sales tax paid on electricity and gas shall be allowed to DTRE approved exporter to the extent of proportionate consumption thereof, in the production of exported goods."

He submitted that a question similar to the one at hand had been referred to the Peshawar High Court which, in Additional Collector, Sales Tax v. Associated Industries Ltd. 2009 PTD 1799 while considering Rule 302A had held that the DTRE Rules did not contain any bar disentitling the exporter from claiming refund/adjustment in respect of input tax paid on goods (other than input goods) purchased for the manufacture of exported goods. (It may be noted that the tax period involved in the Peshawar case also related to the pre-substitution DTRE Rules). Learned counsel also placed reliance on two unreported judgments of this Court, being Great Sea Industries and others v Federation of Pakistan and another C.P. 1684 of 2007 decided on 18-3-2009 and Agro International (.Plat) Ltd. v. Federation of Pakistan and another C.P. No. 2225 of 2008 decided on 11-3-2008. Thus, his case was that the right claimed by the applicant was based on the express provisions of the parent statute and could not be defeated by any rules made thereunder.

8. Mr. Ali Mumtaz Sheikh, learned counsel for the respondent, submitted that the applicant, having opted for the DTRE Rules could not, to suit its own convenience, on the one hand, claim the benefit of the said rules and on the other, ignore the same and make a claim under other provisions of the Sales Tax Act. In other words, the applicant could not approbate and reprobate. He submitted that it was a well settled principle that where the law required something to be done in a particular manner, it had to be done in that manner or not, at all. The applicant, being registered under the DTRE Rules, was bound by the same and any claim for input tax adjustment/refund could only be made within the four corners of the said rules and as provided therein. He referred to various provisions of the DTRE Rules, including the definition of "input goods" in Rule 296(1)(f), to show that the intent was to cover all goods, whether locally procured on imported, as were used for the manufacture of goods to be exported. He submitted that approval for the input goods had to be obtained under Rule 297 and his case was that it was only for the goods so approved that there could be an adjustment/refund (if any) of input tax. Since the goods in question were admittedly not on the approved list, there could be no claim for input refund/adjustment. He stressed that the DTRE Rules were special in nature and submitted that it was well settled that general provisions gave way to special provisions. Thus, the general provisions of the parent Act relied on by the applicant had to give way to and applied only if not inconsistent with, the special provisions of the DIRE Rules. He placed reliance on the following passage from G.P. Singh, Principles of Statutory Interpretation, 9th ed., 2004, emphasizing the portion highlighted:--

"Rules made under the, statute are treated for the purpose of construction as if they were in the enabling Act and are to be of the same effect as if contained in Act. Reference to `any other law' in any provision in the Act will therefore not cover the rules made under the Act. Interpretative notes appended to the Rules by the Rule making authority are part of the Rules and hence statutory. It is a recognized canon of construction that an expression used in a rule, bye-law or form made in exercise of a power conferred by a statute must unless there is anything repugnant in the subject or context have the same meaning as is assigned to it under the statute. But the rules-are to be consistent with the provisions of the Act, and if a rule goes beyond what the Act contemplates, the rule must yield to the Act. But a general provision in the Act cannot apply to special provisions made by valid rules under the Act. Thus provision of notice and limitation prescribed by section 11-A of the Central Excise and Salt Act, 1944 which is general provision for recovery of duty was held to be inapplicable to the special provision made under R.57J (as it stood prior to 1998) for recovery of credit wrongly availed of in relation to the MOD-VAT Scheme" (emphasis supplied)

He also referred to the decision of the Indian Supreme Court cited by the learned author in support of the highlighted portion, Collector of Central Excise Jaipur v. Raghubar India Ltd. AIR 2000 SC 2027. Thus, his case was that an exporter who had opted for the DTRE Rules was bound by, and confined to, the four corners thereof, and was not entitled to any sales tax adjustment/refund that did not come squarely within the said rules.

9. We heard learned counsel for the parties, examined the record with their assistance, and considered the case-law and material relied upon by them. Before considering the submissions made by learned counsel, it is necessary to first advert to certain basic principles that underpin the Sales Tax Act since, as will be explained below, it is a failure to keep these principles in mind that led the Tribunal into serious legal error in the impugned order.

10. The first point to keep in mind is that the Sales Tax Act as currently in force is a value added tax, or VAT. When sales tax is levied in VAT mode, it is charged at each stage in the supply chain as the goods move from the point of origin to the ultimate destination. At each stage, the sales tax is paid on the value added by the supplier concerned. This is done by taking the sales tax charged by the supplier for the goods sold by him (known as the output tax) and subtracting from it the sales tax paid by him for the goods purchased by him (known as the input tax). If the difference (i.e., output tax minus input tax) is positive over A the relevant tax period, i.e., the output tax is more than the input tax, that means that the supplier has to pay the difference to the State. If the difference is negative (i.e., output tax is less than input tax), then the supplier is entitled to a refund of this amount, or its adjustment in the next tax period(s). It will also be noted that in respect of each transaction, other than the first and the last, the sales tax involved has a dual characteristic. For the person making the supply (i.e., the seller) it is his output tax. For the person acquiring the goods (i.e., the buyer) it is his input tax. These are but two sides of the same transaction.

11. The VAT mechanism was succinctly explained in the House of Lords in Fleming (t/a Bodycraft) v. HM Revenue and Customs [2008] UKHL 2 as follows:

"...one of the essential features of VAT ... is the passing on of input tax, to be credited against output tax, along a chain of traders (for instance a supplier of components, a manufacturer, a wholesale distributor and a retailer) until the final output tax is borne by the ultimate consumer. Generally a trader's credit for input tax is obtained by deduction from his output tax, but some traders with a large turnover in zero-rated goods (such as most foodstuffs) may be "repayment traders"-that is, they regularly or occasionally pay amounts of input tax which exceed their output tax, so as to entitle them to a repayment of input tax. By contrast "payment traders" will as a rule simply deduct input tax on making their regular ... returns...." (para. 27, per Lord Walker)

12. The Constitutional Court of South Africa described the VAT mechanism in somewhat more detailed in Metcash Trading Ltd. v. Commissioner of South African Revenue Service and another 2002 (4) SA 317 in the following terms:--

"VAT is, as its name signifies, a tax on added value. It is imposed at each step along the chain of manufacture and distribution of goods or services that are supplied in the country in the course of business; and it is calculated on the value at the time of each such step....

Although the tax is payable on a wide variety of transactions, the present discussion can be confined to the facts of this case, which involves the commercial purchase and sale of goods and can therefore serve as a straightforward example of how the system is supposed to work. The basic idea of VAT is that it is calculated on the value of each successive step as goods move from hand to hand along the commercial production and distribution chain from their original source to their ultimate user. For present purposes it can be accepted that the tax is calculated at the prescribed rate of 14% on the price at which each successive act of handing on takes place. Furthermore, the tax is not only calculated on the value of each successive supply, but is to be paid at that time. As goods move along the distribution chain, everyone making up the sales chain is first a recipient, then a supplier....

Being a tax on added value, VAT is not levied on the full price of a commodity at each transactional delivery step it takes along the distribution chain. It is not cumulative but merely a tax on the added value the commodity gains during each interval since the previous supply. To arrive at this outcome a supplying vendor, when calculating the VAT payable on the particular supply, simply deducts the VAT that was paid when the particular goods were supplied to it in the first place. As a commodity is on-sold by a succession of vendors, each payment of VAT by each successive supplier must then represent 14% of the selling price less the 14% of the price which was payable when that commodity was acquired. According to the scheme of the Act the tax that is payable by a supplying vendor is called output tax and the tax that was payable on the supply to that vendor upon acquisition is called input tax." (paras. 12-14)

13. It is of fundamental importance to keep in mind that in a VAT, the output-input adjustment, and payment of tax in terms thereof, is of the essence of the tax. Without such (or any equivalent) adjustment, the tax would simply cease to be a value added tax. In the case of the Sales Tax Act, the principle is given statutory effect in section 7. This is one of the basic' provisions of the statute.

14. The second point of importance is that value added taxes can be of two kinds, and it is essential to understand the type of VAT that has been given effect to in the statute under consideration. The two types of VAT have been explained in a standard treatise in the following terms (Value Added Tax: A Comparative Approach by Alan Schenk and Oliver Oldman, 2007):

"For most countries with VATs, international trade is a significant component of their economies. A country with a VAT must define the jurisdictional reach of the tax; that is, the tax may be imposed on production within the country (an origin principle VAT), on domestic consumption (a destination principle VAT), or some combination of the two. Almost every country with a VAT relies on the destination principle to define the jurisdictional limits of the tax. Under a pure destination principle, imports are taxed and exports are completely free of tax (zero-rated)." (pg. 180; emphasis supplied)

The importance of zero rating in respect of exported goods has been explained by the learned authors in the following terms:--

"Countries that rely on the destination principle to tax international transactions typically zero rate exports of goods (regardless of the nature of the goods exported)... because those exports will be consumed outside the taxing country. This zero rating is not a preference. The export sales are merely beyond the jurisdictional reach or the tax. The destination principle reflects the near universal understanding that in geographically assigning sales tax or VAT burdens and revenues, the country of consumption gets both...." (ibid., pp. 50-51; emphasis supplied)

15. Under the Sales Tax Act, imports are specifically (and separately) brought to tax by section 3(1)(b). Exports are specifically and expressly zero-rated by section 4. It is therefore quite clear that the Sales Tax Act embodies a destination principle VAT. Since zero rating of exports is a fundamental principle of VAT levied in this manner, it is an essential element of the Sales Tax Act.

16. It will therefore be seen that since the Sales Tax Act is in the form of a destination principle VAT, there are (insofar as is presently relevant) two principles of basic application which must be kept in mind, since they form part of the fundamental structure of the statute. The first is the concept of output-input adjustment and the second is the zero rating of exports. It must be emphasized that these elements are not a concession or benefit granted to or conferred on the supplier (known as the registered person); they are integral to the whole concept of VAT under the Sales Tax Act. A failure to keep these principles in mind can result in a serious and basic misunderstanding and misinterpretation of the Act. It would also be mistaken to regard these elements simply, or merely, a part of the machinery provisions of the Act. Of course, these elements may be modified but, and this is the important point, this must be done expressly, either in the statute itself or in exercise of an express power specifically conferred by the statute. For example, section 8B was added to the Sales Tax Act in 2007. Subsection 1) expressly provides that a registered person is not to be allowed to adjust input tax in excess of ninety per cent of the output tax for the tax period concerned. Subsection (1) opens with a non obstante clause, and section 7 has been expressly made subject to section B. Similarly, section 8(1)(b) expressly confers a power on the Federal Government' to specify, by a notification in the official Gazette, the- goods in respect of which the registered person may not claim input tax, and the Federal Government has exercised this power from time to time. Of course, since this provision is a species of subordinate legislation, which permits a derogation from the basic principles underlying the Act, any exercise of this power must be narrowly and strictly construed. (As noted above, this power has not been exercised in the present case.)

17. In addition to zero-rated supplies, the Sales Tax Act (in line with almost all VATs) also permits exempt supplies, and the difference between the two must also be understood. The position under an exempt supply was explained in the Hotise of Lords in Benyon and Partners v. HM Commissioners of Customs and Excise [2004] UKHL 53 in the following terms:

"[A person making an exempt supply] is treated as if he was a consumer and bears the burden of the whole of the VAT which has been paid when he receives supplies of goods or services for the purposes of his business or profession. His expenses on VAT, like his other expenses, are matters which he must take into account when deciding what to charge his customers." (para. 4, per Lord Hoffman; emphasis supplied)

The position obtaining in respect of a zero rated supply (in the context of exports) is stated in Schenk and Oldman, op. cit., as follows:--

"Zero-rating is the mechanism under a VAT scheme by which the tax can be completely removed from a particular product or service or from a particular transaction. Under a credit-invoice VAT, a seller of a zero- rated item does not charge VAT on the sale. The sale is classified as a taxable sale subject to a zero rate. As such, the seller is entitled to recover as input credit the tax included in the cost of taxable purchases attributable to that sale." (pg 50; emphasis supplied)

18. We now turn to examine the References in the light of the submissions of learned counsel for the parties. The first point to consider is the statutory power under which the DTRE Rules have been framed. The 2001 Rules, of which the DTRE Rules are a part, have been made by F.B.R. (formerly, the Central Board of Revenue) under section 219 of the Customs Act, 1969, under which a general rule making power has been conferred. The Customs Act cannot of course empower F.B.R. to make rules in relation to the Sales Tax Act. The relevant provision under the latter statute conferring a general rule making power is section 50, which at the material time stated that:

"The Board may, by notification in the official Gazette, make rules for carrying out the purposes of this Act including rules for charging fee for processing return, claims and other documents and for preparation of copies thereof" [emphasis supplied].

This is of course entirely unexceptionable. A general rule making power is almost invariably granted in such (or similar) terms. It follows that no. rule can be made inconsistently with the provisions of the parent statute, because such a rule would, by definition, not be "carrying out the purposes" of the enactment and thus be beyond the rule making power. The rule making authority simply does not have any power to make a rule inconsistent with the parent statute, and that is why any such rule is liable to be declared ultra vires. However, where the parent statute is silent on any point, or any provision thereof deals with only a particular aspect of a given matter, then it may be that the rule making power can be exercised in respect of the matter on which the parent statute is silent, or in respect of those aspects of a matter not touched by the parent statute. It may be clarified that such a .conclusion would not follow automatically. Much would depend on the precise terms in which the rule making power is conferred. But at least any such rule may not straightaway get knocked out for being inconsistent with the parent statute. In our view, that is the true import of the Indian decision relied on by learned counsel for the Respondent (where the (Indian) Central Excise Act, 1944 was being considered). The question was whether section 11-A of the Act, which dealt with limitation, was exhaustive, or rules could be framed in respect of matters not covered by the section. The Indian Supreme Court held as follows:--

"Section 11-A is not an omnibus provision which provides any period of limitation for all or any and every kind of action to be taken under the .Act or the Rules but will be attracted only to cases where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded. The section also provides for an extended period on certain contingencies and situations. The situation on hand and the one which has to be dealt with under Rule 57-I, as it stood unamended, does not fall under any one of those contingencies provided for in section 11-A of the Act.... They fall into two distinct and different categories altogether with basic as well as substantial differences to distinguish them from each other." (Collector of Central Excise Jaipur v. Raghubar India Ltd. AIR 2000 SC 2027; para 13)

Since section 11-A on the one hand, and rule 57-I on the other were found, on the true interpretation of both, to apply to entirely different situations, and the India Supreme Court therefore held that rule could not be regarded as inconsistent with the section. As we shall presently see, that is not the position in the case at hand. Furthermore, the question is also whether the DIRE Rules, or more specifically, the interpretation put on them by the respondent department, is inconsistent with the provisions of the Sales Tax Act. That is a question entirely different from the one raised before the Indian Supreme Court. In our view therefore, the principle relied on by learned counsel for the respondent has no application to the facts and circumstances of the present case.

19. Since the Sales Tax Act embodies a destination principle VAT, and the rule making power can only be exercised for "carrying out the purposes" of the Act, it follows that (insofar as is presently relevant) F.B.R. can only frame rules which give effect to, or further the implementation of, a destination principle VAT, as enacted in the Act. The basic principles involved, namely the output- input adjustment and the zero rating of exports have already been explained. In the normal course what happens is that an exporter purchases the goods to be used by him, paying sales tax thereon. That is his input tax. He then manufactures the goods to be exported, and on export, sales tax is payable thereon, but at a rate of zero per cent. The output tax is therefore zero. The difference is refundable to the exporter or adjustable as provided in the Sales Tax Act. What the DTRE Rules do is to simply push back the matter one step behind in the supply chain. The person from whom the exporter buys the input goods on the approved list supplies the goods to the latter at a rate of zero per cent. This is what was meant when the pre-substitution Rule 297(8) provided that "any purchase of input goods from domestic suppliers by an exporter under these rules, being zero-rated shall be free from sales tax" (emphasis supplied). (The present Rule 304(2) achieves the same result by providing that the exporter's supplier shall issue a zero-rated invoice to the exporter.) Insofar as the exporter is concerned, the supply of input goods is being made to him at a rate of zero per cent; his input tax in respect of such goods is therefore zero. His supply (i.e., the exported goods) is, as before, zero rated, i.e., his output tax is also zero. Therefore, in respect of the input goods supplied under the DTRE Rules there is no tax to be paid by the exporter: zero minus zero equals zero. Insofar as the exporter's supplier is concerned, his output tax on the input goods supplied to the exporter is zero (since it is zero-rated). However, he did pay input tax (the tax charged from him by his suppliers). Thus, the exporter's supplier is entitled to a refund/ adjustment of the difference between the (zero) output tax and the input tax. However, and this is the point which must be clearly grasped, the basic position remains the same as before: exports remain zero-rated. It is only that (at least as regards the input goods under the DTRE Rules) the refund/adjustment that results from exports is now moved one step back, to the exporter's supplier.

20. It is important to note that the supply of input goods made to the exporter by his supplier has not been exempted. The difference between an exempt supply and a zero-rated supply has already been explained. Had the supplies been exempted, that would have resulted in the exporter's supplier being put in the position of the final consumer. But the goods in question are to be exported. Their final consumer lies outside the jurisdiction and such goods, in terms of a destination principle VAT like the Sales Tax Act, must be zero-rated. It was therefore necessary to zero rate the supplies of input goods being made to the exporter under the DTRE Rules.

21. The question that immediately arises is, did the F.B.R. have any power to direct that the supply of input goods under the DTRE Rules be zero-rated? The short answer is that at the relevant time (when the 2001 Rules were originally framed, and in 2005 when Sub-Chapter 7 was substituted) FBR had no such power. How then could the supply of the input goods be zero-rated? The answer to this, which holds the key to answering the question raised in the present References, lies in section 4 of the Sales Tax Act. This section, insofar as is presently relevant, provides as follows:--

(4) Zero-rating.---Notwithstanding the provisions of section 3, the following goods shall be charged to tax at the rate of zero per cent:--

(a)? goods exported, or the goods specified in the Fifth Schedule;

(b)? such other goods as the Federal Government may, by notification in the official Gazette, specify;

(c)? such other goods as may be specified by the Federal Board of Revenue through a general order as are supplied to a registered person or class of registered persons engaged in the manufacture and supply of zero-rated goods:

Provided that nothing in this section shall apply in respect of a supply of goods which?

(iii) have been exported to a country specified by the Federal Government, by Notification in the official Gazette:

Provided further that the Federal Government may, by a notification in the official Gazette, restrict the amount of credit for input tax actually paid and claimed by a person making a zero-rated supply of goods otherwise chargeable to sales tax.

22. The first point to note is that clause (a) of section 4 zero rates all exports, without qualification or exception. Thus, the situation in the present References is entirely different from that before the Indian Supreme Court in the Raghubar India case (supra) where section 11-A covered only a part of the matter before the Court (the issue of limitation). The second point is that in addition to all exports, certain other types of goods have also been zero rated, namely those specified in the Fifth Schedule (the last part of clause (a)), those notified by the Federal Government (clause (c)) and those which may be specified by F.B.R. by general order (clause (d)). It may be noted that clause (d).was added to section 4 only in 2008. Although clause (iii) of the proviso does permit the Federal Government to specify the country to which exports may be non-zero rated, it is important to note that this exception is country, and not export, specific. There is, in other words, no power to exclude any exported goods per se; the general rule embodied in section 4 is that all exports are zero-rated. This is of course, entirely in line with the concept of a destination principle VAT.

23. Entry No. 7 of the Fifth Schedule is relevant for present purposes and is in the following terms:--

"Supplies made to exporters under the Duty and Tax Remission Rules, 2001 subject to the observance of procedures, restrictions and conditions prescribed therein."

This entry was added by the Finance Ordinance, 2001, i.e., at the time when the 2001 Rules, containing the DTRE Rules, were framed. Now, the important point to note is that all exports remained zero-rated as before. It was simply that in addition thereto, the supplies made to exporters under the DTRE Rules were also zero-rated. Similarly, the output-input adjustment in terms of section 7 was also not altered in any manner relevant for present purposes. Thus, all that the parent statute (the Sales Tax Act) did was to merely extend zero rating to exporters' suppliers supplying input goods under the DTRE Rules. The position .of the exporters themselves was not altered in any manner whatsoever. In other words, side by side with the exporters, their suppliers under the DTRE Rules were also zero-rated for the supply of input goods. Since Entry No. 7 expressly made the zero-rating of input goods under the DTRE Rules "subject to the observance of procedures, restrictions and conditions prescribed therein", any non-observance would mean that the supply of the input goods would cease to be zero-rated. But, as is obvious, the scope of entry No. 7 is limited only to goods being supplied under the DTRE Rules, i.e., the input goods. How can the DTRE Rules be read and applied so as to after the position of the exporters in respect of other goods also acquired by them for the manufacture of exports (i.e., goods other than the input goods)? Any such interpretation is entirely unwarranted. The DIRE Rules operate and apply only within their own sphere, and only in relation to the supply of those goods which come within their ambit (i.e., the input goods). It is impermissible to extend their scope to cover all goods.

24. In our judgment, the combined effect of the (continuing) zero rating of exports, and the (additional) zero-rating of input goods under Entry No. 7 is therefore simply that insofar as the latter goods are concerned, the refund/adjustment is pushed back one stage in the supply chain, to the registered persons supplying the input goods to the exports. But, as regards all other goods, the position remains unaltered, i.e., the refund/adjustment is, as before, at the end of the supply chain, at the stage of the exporter. There is, as learned counsel for the applicant noted, nothing in the DTRE Rules as applicable (i.e., prior to the 2005 substitution) that derogates from this position. In our view, it could not be otherwise. The DTRE Rules are relatable only to entry No. 7. They cannot modify or after the exporter's position with regard to anything else, i.e., the supply to him of goods other than input goods. Once the foregoing points, and the analysis herein above, are kept in mind, the error into which the Tribunal fell is at once apparent. We note that the Tribunal appears to have examined the post substitution rules, whereas it was the pre-substitution rules that were applicable. However, the Tribunal's error lay at a more fundamental level. It regarded the DTRE Rules as a species of "exemption" or "benefit" which had to be "strictly construed". It failed completely to understand the nature of the Sales Tax Act, and the principles underpinning the structure of the Act, being a destination principle VAT. The DTRE Rules (insofar as is presently relevant) exempt nothing since exports are zero-rated and that basic position remains completely unaltered, as it had to, since the zero-rating of exports is one of the bedrock principles of the parent statute. It is only the output-input adjustment arising out of such zero-rating in respect of input goods supplied under the DTRE Rules that gets shifted back one stage in the supply chain. And that is a matter of administrative convenience. In a supply chain that ends in goods being exported, the State may choose the stage most convenient to it to give effect to the zero-rating. In most cases of course, it is at the end of the supply chain, i.e., at the stage of the actual exporter. But (if the parent statute so permits) there is nothing preventing the State from choosing any prior stage in the supply chain, and that is what has happened in the case of input goods supplied under the DTRE Rules. Insofar as any other goods supplied to the exporter are concerned, their position remained the same as before: the output-input adjustment resulting from the zero-rating took place at the end of the supply chain, i.e., at the stage of the actual exporter. This position was not touched in the parent statute, and therefore, there can be nothing in the DTRE Rules that detracts or derogates from the same. The Tribunal, failing to keep the basic principles in mind, ended up completely misreading and misapplying the said Rules. The impugned order was therefore clearly wrong and could not be sustained.

25. For the foregoing reasons, we had disposed of the references by means of our short dated 31-8-2010, by which Questions Nos.2 and 3 were answered in favour of the applicant and against the respondent.

M.H./P-21/K?????????????????????????????????????????????????????????????????????????????????????? Order accordingly.