SHAZEB PHARMACEUTICAL INDUSTRIES LTD. VS FEDERATION OF PAKISTAN through Chairman, Finance Division, Islamabad, 2015 PTD-KARACHI-HIGH-COURT-SINDH 1532 (2015)

(a) Interpretation of statutes---

----Word 'and'---Conjunctive or disjunctive---Determination---Starting point must be to read 'and' conjunctively and if it leads to a sensible and reasonable meaning, then that is to be preferred over reading the word disjunctively.

(b) Interpretation of statutes---

----Fiscal statute---Exemption---Scope---If taxpayer fairly comes within the scope of exemption, then he cannot be denied the same on the basis of any supposed intention of law maker or authority empowered to grant exemption.

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

----S. 3---Notification SRO 551(I)/2008, dated 11-6-2008---Specific Relief Act (I of 1877), Ss. 42 & 54---Suit for declaration and injunction---Sales tax, recovery of---Pharmaceutical product---Determination---Plaintiffs were pharmaceutical companies and claimed that intravenous infusion manufactured with low density polyethylene of pharmaceutical grade was a pharmaceutical product for the purposes of sales tax exemption under notification SRO 551(I)/2008, dated 11-6-2008---Validity---If notification in question was intended to limit term 'pharmaceutical products' only to those as given in chapter 30 of Import Tariff, then Federal Government could easily had done so, in line with the approach adopted in Sixth Schedule and also had followed in other notifications, however, such had not be done---Term 'pharmaceutical products' could not be limited only to Chapter 30 of Import Tariff, on the basis of any supposed intention of Federal Government---If plaintiffs fairly came within the scope of the notification they would be entitled to the benefit of exemption---Even in relation to Import Tariff itself, while the rules of interpretation were given as a 'preamble' to the same, it was also specifically provided that in case of any classification dispute, decision of Board would be final which it had already given in favour of plaintiffs, many years ago---High Court decided both the issues in favour of plaintiffs and against defendants---Suit was decreed in circumstances.

Collector of Customs v. Shakeel Ahmed 2011 PTD 495; Collector of Customs Lahore and others v. Universal Gateway Trading Corporation and another 2005 SCMR 37; Amin Textile Mills (Pvt.) Ltd. v. Commissioner of Income Tax and others 2000 SCMR 201; Khalid Mehmood v. Collector of Customs 1999 SCMR 1881; Shadman Cotton Mills Ltd. v. Federation of Pakistan and another 2009 PTD 193; Binaco Traders v. Federation of Pakistan and others 2006 PTD 1491; Malik Muhammad Saeed v. Federation of Pakistan and others 2006 PTD 2167 and Dewan Scrap (Pvt.) Ltd. and another v. Customs Central Excise and Sales Tax Appellate Tribunal and others 2003 PTD 2127 ref.

Zaheerul Hassan Minhas and Obaidullah for Plaintiff (in Suits Nos. 843, 941 and 942 of 2014).

Mayhar Kazi for Plaintiff (in Suit No.907 of 2014).

Ms. Masooda Siraj for Defendants Nos. 3, 4 and 5 (in Suit No.843 of 2014).

Sarfraz Ali Metlo for Defendant No.3 (in Suits Nos. 907 of 2014, 941 of 2014 and 942 of 2014).

Ms. Afsheen Aman for Defendant No.4 (in Suit No.941 of 2014).

Muhammad Aslam Butt, D.A.G. for the State.

Date of hearing: 31st October, 2014.

ORDER

MUNIB AKHTAR, J.---These suits are being decided together as they raise the same issues under and in relation to the Sales Tax Act, 1990 ("Act"). On 9-9-2014, the following issues were framed:

(1)Whether the suits are maintainable?

(2)Whether the intravenous infusion (IV infusion) manufactured with low density polyethylene of pharmaceutical grade is a "pharmaceutical product" for purposes of the sales tax exemption under S.R.O. 551(I)/2008 dated 11-6-2008?

(3)What should the decree be?

Learned counsel submitted that these issues, being essentially issues of law, could be decided on the basis of the record and material filed by the parties and evidence did not need to be formally recorded. Accordingly the suits were fixed for final arguments and heard on 31-10-2014. Since the submissions were common, I record the same without distinguishing between the respective learned counsel who advanced the same except to the extent noted. At the conclusion of the hearing, I had allowed learned counsel to file written synopses, and some did so. What is recorded is therefore an amalgam of what was stated at the hearing and in the written synopses.

2.Learned counsel for the plaintiffs drew attention to S.R.O. 551(I)/2008, dated 11-6-2008 ("Notification"), and it will be convenient to immediately reproduce the same, as presently relevant:--

"In exercise of the powers conferred by clause (a) of sub-section (2) of Section 13 of the Sales Tax Act, 1990, the Federal Government is pleased to exempt the goods mentioned in column (2) of the Table below from the whole of sales tax with effect from 1st July, 2008 subject to the conditions and restrictions specified in column (3) thereof, namely:--

3.Learned counsel for the plaintiffs submitted that for the Notification to be applicable, three conditions had to be fulfilled: (a) the imported goods were raw materials; (b) they had to be raw materials for pharmaceutically active ingredients and for the manufacture of pharmaceutical products; and (c) the customs duty on the imports could not exceed 10% ad valorem. It was submitted that in the present suits the goods were low density polyethylene of pharmaceutical grade needed for the manufacture of intravenous (IV) infusions. In this regard reliance was placed on a certificate issued by an assistant drugs controller of the Drug Regulatory Authority of Pakistan. Reference was also made to the Drugs Act, 1976 and to the definition of "drug" given in S. 2(g) therein. This definition provided, as relevant, as follows: 'drug' includes... (vi) immediate packing containers for sterile preparations which are in direct contact with the drug, blood bags, disposable giving sets for infusion of blood, disposable syringes or any other substance or device which the Federal Government may, by notification in the official Gazette, declare to be a "drug" for purposes of this Act". It was further contended that in the Notification, the word "and" as used in the second column had to be read as "or". This was so because, it was submitted, otherwise the second column would not make any sense and become inoperative. Learned counsel further submitted that even prior to the Notification, the same exemption had, in exactly worded language, been available and the exemption had been granted in respect of the goods imported by the plaintiffs and availed accordingly. This had remained true for a great many years. Thus, a uniform interpretation had been adopted throughout and this ought to be recognized. The Notification should therefore be applied accordingly. Its interpretation was a matter of settled departmental practice, which could not be deviated from. Learned counsel for the plaintiff in Suit 907/2014 referred to a flow chart, appended to the plaint, showing the manufacturing process. Learned counsel submitted that the process was a continuous one. The solution had to be put in the granules in a sterile environment and therefore it was not a situation where the container was being manufactured separately and subsequently filled in.

4.Learned counsel for the defendants raised a maintainability issue, submitting that the departmental remedies had not been exhausted. It was contended that the plaintiffs could, and ought to, have approached the Federal Board of Revenue for an appropriate clarification. Insofar as the merits of the case were concerned, it was submitted that the Notification, being an exemption, was not a matter of right. It was well settled that if two reasonable interpretations were available for an exemption the one against the taxpayer had to be adopted. As regards the Notification, it was contended that the word "and" in the second column had to be read as such. It was conjunctive. There were two conditions, both of which had to be fulfilled. It was also contended that there was no "raw material", as such, that was being imported. The goods as imported were already manufactured. It was submitted that the words "raw material" as used in the Notification had to be given a narrow meaning. It was also contended that even if the goods could be regarded as only semi-manufactured, that still did not assist the plaintiffs, since the Notification only applied to "raw materials". Learned counsel also submitted that the infusion sets were equipment and not medicines or drugs. Insofar as the claim of departmental practice was concerned, the same was denied. It was submitted that the record as made available did not support any such claim. Even if there could be a case so made out, it was contended that the Notification was clear on the face of it and the continuation of an incorrect interpretation thereof could not be countenanced. In this regard reliance was placed on a letter written to FBR by the Chief Controller, Customs Appraisement (South) Karachi. It was submitted that this letter, which related to the proper interpretation of the Notification made matters absolutely clear, and it went against the plaintiffs. As regards the definition given in the Drugs Act, learned counsel submitted that clause (vi) in S. 2(g) (as relied upon) had come about by a substitution of the clause by the Drugs (Amendment) Ordinance, 1998. However, that Ordinance lapsed without culminating in an Act of Parliament and hence the clause reverted to its original form, which was simply that a drug could be "any other substance which the Federal Government may, by notification in the official Gazette, declare to be a "drug" for the purposes of this Act". No such notification had been produced in relation to the imported goods.

5.Exercising their right of reply learned counsel for the plaintiffs referred to various goods declarations placed on the record, which showed that the imported goods were being declared, assessed and released as "raw materials" and not otherwise. Insofar as the letter of the Chief Controller was concerned, it was submitted that it was only by way of a suggestion to the FBR; it had not, as such, been acted upon. It was contended that the plaintiffs' case came fully within the scope of the Notification and they were entitled to relief accordingly.

6.I have heard learned counsel as above, examined the record and considered the case-law relied upon. I start with the second issue, which relates to the merits of the dispute. Insofar as the definition of "drug" in the Drugs Act is concerned, I accept the submission by learned counsel for the defendants that the provisions of section 2(g)(vi), as relied upon by learned counsel for the plaintiffs, cannot be given effect to. Clause (vi) was substituted by an Amending Ordinance of 1998 and, as pointed out by learned counsel for the defendants, this lapsed and did not culminate in an Act of Parliament. All the imports that I am concerned with took place several years thereafter. Hence, the point as put forward by learned counsel for the plaintiffs cannot, with respect, be accepted.

7.I turn to the Notification itself. The goods on the importation of which the exemption can be claimed are given in the second column. The first point is that the goods must be "raw materials". The raw materials being imported must be for the "basic manufacture of pharmaceutical active ingredients" and "for manufacture of pharmaceutical products". A crucial question is whether the word "and", which separates the two expressions is to be read as it stands, i.e., conjunctively, or disjunctively, i.e., as an "or"? The defendants urge the former while the plaintiffs contend for the latter reading. I accept the submission by learned counsel for the defendants that in the case of an exemption it is for the taxpayer to show that he comes within the scope thereof and if two reasonable interpretations are possible, the one against him will be adopted. This is trite law. The starting point must therefore be to read the "and" conjunctively. If this leads to a sensible and reasonable meaning, then that is to be preferred over reading the word disjunctively. In contending for this reading, learned counsel for the defendants submit that the other option, i.e., reading the "and" as an "or", would render the first expression redundant. This is so because the "basic manufacture of pharmaceutical active ingredients" would then in any case be covered by and in the "manufacture of pharmaceutical products". One learned counsel for the defendants put the point as follows in his written synopsis: "there can't be a pharmaceutical product without active pharmaceutical ingredient". Now, in the letter written by the Chief Controller to FBR, also relied upon by the defendants, it has been stated that pharmaceutical products fall in Chapter 30 of the Pakistan Customs Tariff (relating to imports, the Second Schedule to the Customs Act, 1969) whereas what the plaintiffs manufacture falls within Chapter 90. It is contended in the letter on this basis that the goods imported by the plaintiffs are unrelated to pharmaceutical products and hence cannot be entitled to the exemption. A bare perusal of Chapter 30 shows that it lists many goods other than pharmaceutical (i.e., medicinal) products. Furthermore, there are pharmaceutical products listed in this Chapter that clearly do not have any "pharmaceutical active ingredient". For example, PCT 30.06 relates to "Pharmaceutical goods specified in Note 4 to this Chapter" and includes such products as "sterile surgical catgut" and "sterile tissue adhesives". It cannot therefore be accepted, even on the defendants' own showing, that all pharmaceutical products must necessarily have a pharmaceutically active ingredient. Furthermore, if the "and" is to be read as such, then it would have to be the case that the raw materials being imported are to be used both for the basic manufacture of "pharmaceutical active ingredients" and for the manufacture of "pharmaceutical products". This cannot be for the obvious reason that once the imported raw materials have been used in the manufacture of the former, they cease to be such; it is then the pharmaceutical active ingredient that is used for the manufacture of the pharmaceutical product. The express use of "manufacture" twice would, on the literal reading contended by learned counsel for the defendants, result in an anomalous situation. Of course, if instead of "and" the word "used" (or some such) had been employed then the meaning urged by learned counsel would have been possible. Then, the importer would have to show that the raw materials were for the basic manufacture of pharmaceutical active ingredients, which ingredients were to be used for the manufacture of pharmaceutical products. This however is not the case. In my view therefore, the use of "and" as such does not lead to a sensible or reasonable meaning. On the other hand, if understood disjunctively (i.e., as an "or") there is no redundancy as apprehended by learned counsel. The condition would then be that the raw materials are to be used either for the basic manufacture of pharmaceutical active ingredients or the manufacture of pharmaceutical products. The express use of "manufacture" in both contingencies would be accommodated. Since goods that fall in the latter category do not all necessarily have a pharmaceutical active ingredient, either condition could apply on its own, depending on the facts and circumstances of each case. Therefore, with respect, I conclude that the word "and" in the second column has to be read disjunctively.

8.When the word is so read, it is the plaintiffs' case that the goods that they manufacture with the imported raw material are "pharmaceutical products". It will be convenient to take up here the submission made by learned counsel for the plaintiffs that the exemption was available for many years even prior to the Notification in terms substantially or exactly as put in the latter, and the exemption had been availed without objection. I have considered the material placed on the record in the various suits. As is well known, exemptions under S.13 of the Act are available either in terms of the Sixth Schedule to the Act or by means of a notification issued by the Federal Government. Now, the Sixth Schedule was added to the Act in 1996 (and S.13 suitably substituted). As so added, it had, in entry No. 43, granted an exemption in the following terms: "raw materials for manufacture of pharmaceutical products; if imported these will be subject to similar conditions as are envisaged for the purposes of the Customs Act...". The Sixth Schedule was subsequently substituted in its entirety in 1998 and, as far as I can make out, had no entry similar to the one just noted. However, thereafter, the exemption started appearing in various notifications issued by the Federal Government under S.13. Reference may be made to S.R.O. 211(I)/2002 dated 6-4-2002. This provided exemption for "raw materials for the basic manufacture of pharmaceutical active ingredients and for manufacture of pharmaceutical products". These are the exact words that now appear in the Notification. (The exemption in the notification of 2002 was subject to a proviso, which is not relevant for present purposes.) This notification was replaced by S.R.O. 673(I)/2005 dated 2-7-2005, which provided for exemption in exactly the same terms. Now, it appears that in 2007 a question arose whether the importation of low density polyethylene of pharmaceutical grade came within the scope of this exemption. The Central Board of Revenue considered the matter, and by letter dated 3-3-2007 informed the Collector (Appraisement) Custom House, Karachi as follows (emphasis supplied):--

"The issue of availability of sales tax exemption to Low Density Polyethylene (Pharmaceutical Grade) in terms of S.R.O. 673(I)/2005 dated 2-7-2005 has been examined by the Board. It is pointed out that Board's C.No.1(9)SS-VAL/88 dated 8-9-1997 resolved the issue with reference to similar exemption then available under S.No. 43 of the Sixth Schedule to the Sales Tax Act, 1990. S.R.O. 673(I)/2005 has only broadened the scope of the said exemption. Therefore, Board's C.No.1(9)SS-VAL/88 dated 8-9-1997 is still valid."

Thereafter, in 2008 the Notification was issued (and S.R.O. 673(I)/2005 simultaneously rescinded). It is therefore clear that, as contended by learned counsel for the plaintiffs, the position taken by the Board has been that the importation of low density polyethylene (pharmaceutical grade) has been regarded as entitled to exemption from sales tax since at least 1996. On the face of it, this constitutes a departmental practice or position consistently adopted and applied. The stance now adopted by the Chief Controller (though not the Board) is clearly inconsistent with this settled position.

9.However, learned counsel for the defendants contended that the Board's interpretation and application of the exemption is wrong and no reliance can be placed on it. In this regard, learned counsel relied on the following observation in a Division Bench decision (to which I was party) of this Court reported as Collector of Customs v. Shakeel Ahmed 2011 PTD 495:--

"24. We are therefore of the considered opinion that if there is past departmental practice which is being carried on a wrong interpretation and in violation of law then such a practice has to be stopped and the interpretation in accordance with law has to be given effect to."

The question therefore is whether the plaintiffs are right in asserting that the goods that they manufacture with the raw material are "pharmaceutical products". Now, the Notification does not define "pharmaceutical products" nor is there any relevant or applicable definition in the Act itself. Chapter 30 of the Import Tariff however is titled "Pharmaceutical Products". The question therefore is whether the term "pharmaceutical products" as used in the Notification is to be limited only to those goods that fall in Chapter 30 or is to be interpreted and applied independently of it. In order to answer this question, another well established rule applicable to exemption notifications must be kept in mind. It is this: if the taxpayer fairly comes within the scope of the exemption, then he cannot be denied the same on the basis of any supposed intention of the law maker or the authority empowered to grant the exemption. Now, an examination of the Sixth Schedule to the Act and various notifications issued under S.13 shows that references are frequently made to the Import Tariff therein by referring to various heading Nos. and goods as classified under specific entries thereof. Indeed, the Sixth Schedule concludes with various "notes" of which the first two may be referred to:

"1. For the purpose of this Schedule, for entries against which classification of headings or sub-headings has been specified, exemption shall be admissible on the basis of description of goods as mentioned in column 2 of the Schedule Pakistan Customs Tariff classification of headings is provided for ease of reference and commodity classification purposes only.

2. For the purposes of determining classification of any goods, the general rules for interpretation of the First Schedule to the Customs Act, 1969 (IV of 1969) and Explanatory Notes to the Harmonized Commodity Description and Coding System (relevant version) as amended from time to time shall be considered authentic source of interpretation."

The exemption presently under consideration is of course not under the Sixth Schedule and the "notes" are, strictly speaking, not applicable. However, in my view two points do emerge. Wherever the intent is to specifically limit the exemption to goods that fall under a particular classification of the Import Tariff, then reference is made to the relevant heading therein. Other things being equal, it is then the description as given in the Import Tariff (and subject to the rules of interpretation in relation thereto) that will apply. But from this a converse conclusion also follows. Wherever the exemption (and especially one granted by a notification and not in the Sixth Schedule itself) does not specifically refer to a heading in the Import Tariff, then any term or words used therein ought not to be read as limited only to the Import Tariff; the words are to be interpreted and applied on their own footing. In the present case, if in the Notification it was intended to limit the term "pharmaceutical products" only to those as given in Chapter 30 then the Federal Government could easily have done so, in line with the approach adopted in the Sixth Schedule and also followed in other notifications (and indeed, elsewhere in the Notification itself). However, this has not been done. Therefore, in my view the term "pharmaceutical products" cannot be limited only to Chapter 30 of the Import Tariff, as contended by the Chief Controller, on the basis of any supposed intention of the Federal Government. If the plaintiffs fairly come within the scope of the Notification they would be entitled to the benefit of the exemption. Secondly, even in relation to the Import Tariff itself (i.e., in the Customs Act), while the rules of interpretation are given as a "preamble" to the same, it is also specifically provided that in case of any classification dispute, the decision of the Board shall be final. In the present case as noted above the Board has already, and many years ago, given its decision decisively in favour of the plaintiffs.

10.It only remains to be seen therefore whether the term "pharmaceutical products" is, on its ordinary meaning, broad enough to cover the intravenous infusion sets being manufactured by the plaintiffs, in which the imported goods are being used. In my view, the answer ought to be in the affirmative. It is pertinent to note that the Notification uses the word "products". This is clearly of broader significance than "drugs", in the sense in which the latter is used in the Drug Act. There is hardly any doubt that what goes into the infusion sets (and is ultimately delivered intravenously to the patient) is "pharmaceutical" in nature. Therefore, the position adopted by the Board, as noted above, is consistent with the term "pharmaceutical products" and not contrary thereto. In my view, the observation from the Division Bench decision of this Court relied upon by learned counsel for the defendants does not therefore apply. For all of the foregoing reasons, the plaintiffs' case comes within the scope of the Notification. I would therefore decide the second issue in the affirmative.

11.I turn to the first issue. Various grounds have been taken by learned counsel for the defendants to challenge the maintainability of the suits. Reference has been made to S.217 of the Customs Act. With respect, neither this provision nor its equivalent in the Act, S.51, applies. The substantive issue before me relates to the proper interpretation, scope and application of an exemption notification. The determination of the true legal meaning of such an instrument is, in the end, always a matter for the Court to determine. Equally, with respect, references to S.9, C.P.C. and S.42 of the Specific Relief Act, 1877 are not relevant. The case law relied upon by learned counsel may now be considered. Reliance was placed on Collector of Customs Lahore and others v. Universal Gateway Trading Corporation and another 2005 SCMR 37. The case arose under the Customs Act. At issue was whether certain goods had been lawfully imported by the respondents or smuggled. No question arose regarding the interpretation of any statutory provision or subordinate legislation such as an exemption notification. With respect, this decision is not of any direct relevance. Reliance was placed on Amin Textile Mills (Pvt.) Ltd. v. Commissioner of Income Tax and others 2000 SCMR 201. This case arose under the Income Tax Ordinance, 1979. The question was whether the impugned notices, issued under section 65 of the said Ordinance, were within, and in proper exercise of, the jurisdiction of the income tax officer. Again, with respect, this question is substantively different from the one raised in the present Suits. Reliance was placed on Khalid Mehmood v. Collector of Customs 1999 SCMR 1881. This case arose under the Customs Act. It related to an allegation of smuggling against the petitioner. The petitioner had launched proceedings under the Customs Act and, having failed before the Collector Appeals, chose to institute a constitutional petition in this Court and not avail the statutory remedy of appealing to the Appellate Tribunal. The question was whether the constitutional petition was maintainable. As is clear, the question was raised in terms rather different from the substantive issue that arises here. Reliance was placed on Shadman Cotton Mills Ltd. v. Federation of Pakistan and another 2009 PTD 193 (SHC; SB). The proceedings were by way of a suit on the Original Side, relating to the Customs Act. I may note that the matter decided was an application seeking rejection of the plaint. The plaintiff however, was not represented at the hearing. The learned single Judge noted that he had heard the application in the absence of learned counsel for the plaintiff "on the insistence of learned counsel for the defendant". With the utmost respect, in such circumstances the cited decision can hardly be of any value, even if only persuasive (it is of course, obviously not binding on me). The question involved was regarding the vires of certain exemption notifications challenged by the plaintiff The learned single Judge, relying in part on section 217 of the Customs Act, concluded that such a challenge could not be mounted by way of a suit. With respect, I disagree. As noted above, section 217 has no bearing in relation to such an issue. Reliance was placed on Binaco Traders v. Federation of Pakistan and others 2006 PTD 1491 (SHC; SB). This was also a decision in proceedings by way of a suit, relating to the Customs Act. The plaintiff sought to challenge a decision by the Customs authorities to take over his imported goods under section 25-A of the Customs Act (as it then was) on account of alleged undervaluation thereof As is obvious, the issue raised in the suit was completely different from the one at hand. Reliance was placed on Malik Muhammad Saeed v. Federation of Pakistan and others 2006 PTD 2167. Again, these proceedings were by way of a suit relating to the Customs Act. At issue was the importation of a car allegedly in violation of the relevant rules and procedures, and the resultant imposition of fine and penalty. With respect, this is not the issue at hand. Reliance was placed on Dewan Scrap (Pvt.) Ltd. and another v. Customs Central Excise and Sales Tax Appellate Tribunal and others 2003 PTD 2127 (SHC; SB). The plaint was sought to be rejected on the ground of lack of territorial jurisdiction and also with reference to section 217 of the Customs Act and whether a decision of the Appellate Tribunal could be challenged by way of a suit on the Original Side. The first and last grounds were accepted by the learned single Judge and the plaint rejected. As is obvious, these grounds do not exist in the present suits. I therefore conclude that the defendants have been unable to show that the suits are not maintainable. Accordingly, the first issue is decided in the affirmative.

12.Since both issues have been decided in favour of the plaintiffs and against the defendants, suits are decreed as prayed.

MH/S-13/SindhSuit decreed.