PAKISTAN PAPER PRODUCTS LIMITED VS SECRETARY TO THE GOVERNMENT OF PAKISTAN, REVENUE DIVISION, 2010 PTD-KARACHI-HIGH-COURT-SINDH 716 (2009)

Sales Tax Act (VII of 1990)---

----Ss.3(2), 6 & 8(2)---Central Excise Rules, 1944, Rr.7, 9, 52-A, 54, 55, 220, 236, 241, 244 & 246---Constitution of Pakistan (1973), Art.199---Constitutional petition---Import of Diazo Base Paper for manufacturing sensitized papers required for preparation of blue prints/sketches---Use of waste of Diazo Base paper for wrapping/ packing end product i.e. rolls of sensitized papers---Demand of sales tax and excise duty on such paper wastage as packing material---Validity---Wrapping papers were neither manufactured distinguishably nor produced in style and shape that they could be used independently, but could only be used as wrapping paper for end product---Such waste paper could not be considered a new inter-mediatory item---Wrapping paper had already undergone levy of sales tax and excise duty on its value and weightage, thus, tax credit availed on such wastage could not be disallowed by department---High Court quashed impugned show-cause notice in circumstances.

Collector of Central Excise and Sales Tax (Central), Karachi and another v. Hilal Steel Industries (Pvt.) Ltd. 2001 PTD 3945 ref.

Madina Ghee Mills (Pvt.) Ltd. v. Collector of Customs, S.T. & C.E. (Adjudication), Faisalabad, 2002 YLR 2999 and Sheikhoo Sugar Mills Ltd., and others v. Government of Pakistan and others 2001 SCMR 1376 rel.

Ms. Pooja Kalpana for Petitioner.

Umer Hayat Sandhu, Dy. A.-G. for Respondent.

Date of hearing: 21st May, 2009.

JUDGMENT

MUHAMMAD ATHER SAEED, J.--- This constitutional petition was filed impugning the order passed by the Central Board of Revenue in Revision No. 2(297)STR/93 dated 10-1-1994 whereby the observation made in the order-in-original that tax credit is admissible only on the quantity of raw material which is used in the manufacture of taxable supplies, was held correct and thus the Order-in-Original and the order in appeal passed by the relevant forums were upheld.

2. The petition was heard by a Division Bench of this Court and was disposed of vide judgment of the Division Bench dated 19-4-2003 wherein this Court had allowed the petition and quashed the show-cause notice and all the subsequent orders passed in pursuance thereof holding it to be without lawful jurisdiction. This decision was taken by the learned Division Bench for the reason that they had concurred with the arguments of the learned counsel for the petitioner that whenever any longstanding departmental practice is sought to be deviated by the department, the department has to show that it has very strong reasons for exercise of jurisdiction in. this behalf which was found lacking in the present case.

3. Being aggrieved by the judgment of this Court the respondent department filed a Petition for Leave to Appeal before, the Honourable Supreme Court and the Honourable Supreme Court vide its judgment dated 1st November, 2006 in Civil Appeal No. 1695 of 2003 passed the following order:-

"After addressing arguments at considerable length learned counsel for the parties agreed for remand of the case to the High Court to examine whether the waste paper of the diazo base paper (which is used for making sensitized paper required for preparation of blue prints/sketches) used for the purpose of packing sensitized paper so prepared can be considered a new inter-mediatory item.

2. In view of the above argument of the counsel for the parties, the appeal is allowed and the impugned judgment of the Sindh High Court dated 19-4-2003 is set aside and the case is remanded to the High Court for fresh decision in accordance with law. No order as to costs."

4. The facts of the case as stated in the earlier judgment passed by this Court which had been set aside by the Honourable Supreme Court of Pakistan are as under:-

"Briefly stated the facts giving rise to this petition are that the petitioner is a public limited company, engaged in the manufacture of sensitized papers and for the manufacture thereof, imports Diazo Base Paper from abroad, which is ultimately coated to manufacture the rolls of sensitized papers.

According to the petitioner, in the process there is some waste of Diazo Base Paper, which is used and consumed- as packing material for the end-product and rolls and sensitized papers are wrapped and packed therewith. Thus no commodity in the form of waste paper is left, no independent sale or independent use of the waste paper is made. 100% of paper is used by way of packing and wrapping paper, simultaneously, with the production and sale of the sensitized papers. The value for the sale of end-product is the composite cost of the goods produced and the cost of packing and wrapping is included therein. This process and practice is in existence for a period of three, decades.

However, in the year 1991, Superintendent of Central Excise and Sales Tax started correspondence, stating that the waste paper is shown in RG-2 Register and RT 3 Returns but no physical balance was found in the factory premises and, therefore, excise duty and sales tax was required to be paid on the wastage. The petitioner informed that the wastage is utilized in the manufacturing process of product for the purpose of wrapping and packing of the same product and, therefore, no physical availability of the wastage is shown. However, the Superintendent was not satisfied and, therefore, on the basis of his report, the respondent No.4 issued a show-cause notice, 'as to why legal action for violation of various provisions, contained in Central Excise Rules and Sales Tax Act, 1990, may not be taken'. The petitioner again explained the position to the respondent No.4. The petitioner and the representative of the Department were heard. Respondent No.4, asked he petitioner to produce evidence, showing payment of Central Excise and Sales Tax on paper wastage as packing material and observed that they could not produce the .same, except a plain chart of cost of ammonia sensitized paper rolls-. Respondent No.4 thereafter gave the following findings:

"8. As charge levelled in the show-cause notice are established that the paper wastage utilized in the packing of the produce are leviable to Central Excise Duty and Sales Tax. I therefore, direct Messrs Pakistan Paper Product Limited, Karachi, to immediately pay Central Excise Duty amounting to Rs.1,37,955 on 31,763.943 Kgs. of waste product used as packing material:

9. I impose of penalty of Rs.95,000 under rules 7, 210 and 246 for violation of Rules 7, 9, 52, 52-A, 53, 54, 55, 220, 236, 241, 244 and 246 of Central Excise Rules, 1944 for contravention of ,section 3(2), 6, 8(2) of Sales Tax Act 1990."

The petitioner preferred appeal before respondent No.3, taking various pleas of facts and law. One of the pleas taken on behalf of the petitioner was that wastages were of import raw material base paper and accrued prior to manufacturing stage, hence these were not excisable in any case. It was further contended that waste was used as packing material and thereby became part of end-product, which has been cleared on payment of taxes and duties, therefore, the payment of taxes and duties on waste paper is automatically included in the payment of taxes and duties on the end-product.

The Departmental representative conceded that wastage accrued both prior sensitization and after sensitization. It was submitted on behalf of the departmental representative that the petitioner has not shown the disposal of the wastage. A plea on behalf of the petitioner was that they submitted RD-3 returns regularly and had duly accounted wastage material by showing it as packing material.

The respondent No.3 partly accepted the plea and disposed of the appeal with the following findings.

"I have examined the record and heard the parties and come to the conclusion that the wastage occurred as claimed by the party prior to the paper being sensitized and as such no excise duty become leviable. However, as imported paper was cleared, according to factory's own admission, as wrapping paper, they were not entitled to get any Sales Tax refund adjustment on the same. They are, therefore, directed to pay the Sales Tax amounting to Rs.1,37,955 as demanded vide impugned order. The demand on account of Central Excise Duty amounting to Rs.9,529 and consequently penalty imposed amount to Rs.95,000 are set aside. The penalty of Rs.10,000 imposed for violation of section 33, however, is upheld. The appeal is disposed of accordingly."

"The petitioner still dissatisfied preferred revision application before, CBR, which was rejected with the observation that the tax adjustment is admissible only on the quantity of raw material, which is used in. the manufacture of taxable supply. The learned Member C.B.R. /Additional Secretary gave no findings, whether factum of use of raw material in the manufacture of taxable supply was established or not.

After rejection of the revision application, the petitioner has filed this Constitutional Petition under Article 199 of the Constitution."

5. We have heard Ms. Pooja Kalpana, Advocate for the petitioner and Mr. Umer Hyat Sandhu Deputy Attorney General appearing -on behalf of the respondent department on the point on which the Honourable Supreme Court has remanded the case to this Court.

6. Ms. Pooja Kalpana submitted that the respondents' case according to the show-cause notice issued and the orders passed by the forums below was not that the wastage of the diazo base paper, which has been used for manufacture of sensitized paper, was a new inter-mediatory item but their case throughout was that under section 8 of the Sales Tax Act, 1990 credit adjustment of sales tax is admissible only on the quantity of raw material which is used in the manufacture of taxable supplies whereas the credit adjustment of the sales tax has been availed on the entire quantity of raw material while tax has been paid only on he quantity which was consumed in the end-product, therefore, adjustment of sales tax was not allowable on the quantity of wastage which was not consumed in the end-product and that is why the amount of sales tax duty and central excise duty had been charged on such products by the lower forums.. The learned counsel submitted that the department has not properly examined the factual position of the case and has not brought any thing on record to rebut the contentions made by the petitioner in the reply they filed to the show-cause notice wherein they had stated that the entire wastage was utilized as wrapping paper for the sensitized papers produced out of the imported products and since the weight of this wastage paper consumed in the roll for packing purpose was included in the weight of the end-products as the excise duty/sales tax was chargeable on the weight of the roll declared, which also included the weight of the paper so consumed in the packing of the rolls and therefore the petitioner had paid sales tax and excise duty on the weight of diazo base papers consumed as packing material in the sensitized paper rolls and since at the time of clearance this had been considered both in weight and value as such excise duty and sales tax had been duly paid on the base papers consumed in the packing of sensitized paper rolls. She further submitted that perusal of all the orders passed by three forums below will reveal that this argument of the petitioner had not been rebutted by the departmental officials and without rebutting this argument and just making a general assertion that sales tax and central excise duty was not paid on wastage used as packing material and after -accepting the contention that the wastage was used as packing material, they had levied, the amount of central excise duty and sales tax on wastage impugned in this petition. She further submitted that the Collector (Appeals) in his order, after examination of record and hearing the parties, had come to the conclusion that since the wastage occurred prior to the paper being sensitized and as such no excise duty became liable. According to her this contention of the Collector Appeal establishes that the wastage used as wrapping paper had not become an inter-mediatory product because it occurred before the manufacture of sensitized paper and such contention was not challenged by the department by filing any appeal or revision against it. She further submitted that by use of wastage as wrapping paper it became a part of the end-product on which sales tax and central excise duty is leviable both on the. value and the weight and, therefore, further contention of the Collector Appeals that since the same was cleared as wrapping paper the petitioners were not entitled to get any sales tax refund adjustment on the same is not correct. On the .point on which this matter has been remanded back by the Honourable Supreme Court the learned counsel argued that the wastage used as wrapping paper for the sensitized paper could not be termed inter-mediatory product as it had become part and parcel of the end-product. In this connection she relied on the following judgments.

(1) Collector of Central Excise & Sales Tax (Central), Karachi and another v. Hilal Steel Industries (Pvt.), Ltd. 2001 PTD 3945.

(2) Madina Ghee Mills (Pvt.) Ltd., v. Collector of Customs, S.T. & C.E. (Adjudication), Faisalabad, 2002 YLR 2999.

7. She further submitted that the case of Sheikhoo Sugar Mills Ltd., and others v. Government of Pakistan and others, 2001 SCMR 1376, is distinguishable and will not apply to the case of the applicant' as in that case the baggasse which was produced during the process of extraction of sugarcane to obtain juice for the petitioner, was sold, as completely a separate product to be consumed distinguishably and distinctly as a fuel against the value which was to be calculated at market price whereas in the case of the present petitioner the wastage has been consumed as wrapping paper for the end-product and sold as a component of end-product and therefore according to her the case of Lahore High Court in Madina Ghee Mills (Pvt.) Ltd. quoted supra shall apply with all force to the case of the petitioner.

8. The learned DAG strongly rebutted the arguments of the learned counsel for the petitioner and submitted that the case of the department is clear from the show-cause notice and the Order-in-Original wherein it has been clearly stated that the present petitioner could not prove that they had paid any excise duty and sales tax on the wastage used as wrapping paper for the end-products i.e. sensitized papers. He submitted that the use of the wastage for packing of sensitized paper can lead to only one conclusion that the wrapping paper is a by-product of the manufacture of the sensitized diazo base paper and as such will be taxable as inter-mediatory product. In this connection he relied on the judgment of the Honourable Supreme Court in the case of Sheikhoo Sugar Mills Ltd. quoted supra which the learned counsel for the petitioner tried to distinguish.

9. We have examined the case in the light of the arguments of the learned counsel and have carefully perused all the orders of the lower forums, the previous judgment delivered by this Court and the consent judgment of the Honourable Supreme Court.

10. From a perusal of the judgment of the Honourable Supreme Court we have seen that the only reason for the remand of the case back to this Court is to determine whether the waste paper of the diazo base paper (which is used for making sensitized paper required for preparation of blue prints/sketches) used for the purpose of packing sensitized paper so prepared can be considered a new inter-mediatory item.

11. From a perusal of the show-cause notice issued by the Department we have seen that initially the view of the department was that the wastage was not accounted for and that the 'waste constitutes goods within the meaning of section 2(F) of the Central Excise and Salt Act, 1944 and section 8(2) of the Sales Tax Act, 1990 and since no tax had been paid on such wastage therefore tax credit had wrongly been availed. However, during the hearing of the case when the plea was taken that the wastage was used as wrapping paper of the end-product, the Deputy Collector Adjudication held that the petitioner could not produce any evidence showing payment of central excise duty and sales tax on wastage used as packing material. What, in our opinion, was important is that the Deputy Director Adjudication should have examined whether the taxability of the sensitized paper packed in the wrapping paper made out of wastage was on the basis of value and weight of the end-product and whether the value of the wrapping paper was included in the cost of the end-product and whether the central excise duty and sales tax has already been levied on the wastage of the wrapped products because only after such examination he could have come to the conclusion whether the wrapping paper had been subjected to sales tax and central excise duty as part of the end-product and this was not done. The second argument which could have been taken by the department would have been that the process of valuation of the end-product is not on the basis of weightage because unless he did that there can be no way he could hold that the...petitioner had not been able to produce evidence that the sales tax and excise duty had been paid on such wastage. We are, therefore, of the opinion that the department has not been able to disprove, as asserted by the petitioner that the entire wastage was utilized as wrapping paper for end-product and that weightage and value of this wrapping paper was not considered for the purpose of levy of sales tax and central excise duty on the end-product since it had become part of the end-product.

12. We would now examine the case in the light of the query proposed by the Honourable Supreme Court. For this purpose we perused the judgments of the Lahore High Court in Madina Ghee Mills (Pvt.) Ltd. quoted supra. In that case the question was whether the plastic pouches manufactured for packing oil and banaspati products by the petitioner company could be termed as inter-mediatory products and the learned Lahore High Court held as under:-

(10) The revenue is also incorrect in stressing that the appellants take any process with regard to pouches which be termed as manufacturing as defined in the aforesaid provision of the Central Excise Rules, 1944 or the Sales Tax Act, 1990..The appellants admittedly purchased printed plastic sheets on rolls which were fed to automatic machines and accordingly they became a part of the manufacturing process for simultaneous packing of ghee so produced. These plastic pouches were neither manufactured distinctly nor produced in a style or shape that these could be stored used independently. Having become the process of manufacturing of ghee/oil they became the part of the product namely vegetable ghee in plastic pouches which was properly conversable in H.S. Code No.15-16. It was particularly so because these pouches were not reuseable.

13. The case of the petitioner before us is even on better footing than the above case because in that case at least a separate manufacturing process was employed for production of plastic pouches whereas in this case the wastage which was later on used as wrapping paper was a result of the production of the sensitized paper for which it was used as packing material and therefore there was no independent manufacturing operation involved. We fully agree with the observation of the learned Lahore High Court that these wrapping papers were neither manufactured distinguishably nor produced in the style and shape that they could be used independently and could only be used as wrapping paper for the end product.

14. We have also examined the judgment of the Honourable Supreme Court in the case of Sheikhoo Sugar Mills Ltd. quoted supra and we agree with the contention of the learned counsel for the petitioner that the facts in that case were different because the Honourable Supreme Court has held that bagasse was inter-mediatory product which is manufactured/produced during the process of extraction of sugarcane to obtain juice and is used distinctly as fuel and no sales tax had apparently been paid on the sale of such bagasse.

15. On the basis of the above discussion we have formed a considered opinion that the waste paper of the diazo base paper (which is used for making sensitized paper required for preparation of the blue prints/sketches) used for the purpose of packing sensitized paper so prepared cannot be considered a new inter-mediatory item. We also hold that this wrapping paper has already undergone levy of sales tax and central excise duty on its value and weightage and therefore, there is no basis for the department to disallow tax credit which had been availed on such wastage.

16. As a consequence of our above opinion, we allow this constitutional petition and quash the impugned show-cause notice and the impugned orders emanating from such show-cause notice.

17. This petition is disposed of in the above manner.

S.A.K./P-21/KPetition accepted.