SAJJAD ALI SHAH, J. - This appeal has been filed against the order of the Customs Excise and Sales Tax Appellate Tribunal, Karachi dated 17.10.1998.
2. The following question of law, arising out of the order of the Tribunal, was framed for determination by this Court vide its order dated 10.11.2005:- Whether the leamed Customs & Sales Tax Appellate Tribunal, Karachi Bench erred in holding that the supply of twisted steel bars made by the appellant to the recipients was chargeable to sales tax on their full value of the goods instead of on the conversion charges only which were received by the appellant?
3. The facts giving rise to the present controversy are that the appellants are engaged in conversion of the ship plates into mild steel twisted bars. A show-cause notice dated 14.2.1998 was issued by the Additional Collector, Sales Tax, East Karachi on the ground that the appellants have unlawfully paid fixed sales tax on the manufacture of MS re-rolled products during the period from 1st July, 1996 to 30.12.1996 and on the basis of conversion charges from January, 1997 to 30th June, 1997 instead of paying sales tax at standard rates on the value of the supplies, It was the case of the Department that since the Notification in respect of fixed Sales Tax Scheme was rescinded therefore the appellants had become liable to pay sales tax at standard rate from 1st July, 1996 onwards. The appellants admitted before the Tribunal that since Fixed Tax Rules were rescinded by the Federal Government and therefore the appellants had become liable to pay sales tax at standard rate on the value of goods supplies from 1.7.1996 to December, 1996, as such this portion of the controversy sands.Finally resolved. The controversy in the case in hand is only to the extent whereby the Tribunal found the appellants liable to pay sales tax for the period commencing from 1.1.1997 to 30.5.1997 at standard rates on the value of supplies instead of on conversion charges.
4. Mr. Aziz A. Munshi, learned counsel for the appellants, has argued that since the appellants have received the raw material i.e. Ship plates from their Principals and after processing it and converting it into MS twisted bars returned the same to their Principal on receipt of processing or conversion charges, therefore they are only liable to pay sales tax on the amount received from their Principal i.e. Conversion charges and not on the value of the supplies, It was further argued that in the year 1998 the respondent No. 1 issued Sales'Tax General Order 1 of 1998 by interpreting the value of supply in the cases of like nature as the consideration/charges of conversion received by the job worker.
5. . On the other hand, Mr. Raja Muhammad Iqbal, learned counsel for the respondent, has pleaded that the appellants were liable to pay the sales tax on the valGe of their supply during the period from 1.1.1997 to 30.6.1997 and not on the basis of conversion charges, In support of his contention, he has placed reliance on the case of Amber Tobacco-Co. (Pvt.) Limited v. Additional Collector Sales Tax (2003 PTD 800) and an unreported judgment delivered by Division Bench of this Court in' the case of General Tyre & Rubber Co. Pakistan Limited v. Deputy Collector and others (Spl. Sales Tax A.
No. 38 of 2004).6. To determine the controversy - as framed reference is to be made to the charging provision in the Sales Tax Act, 1990. Relevant provision in sub-section (1) of Section 3 of Sales Tax Act reads as follows:-- "(3) Scope of tax. - (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of fifteen percent of the value of:
(a) taxable supplies made rn Pakistan by a registered person in the course of furtherance of any taxable activity carried' on by him; and
(b) ..................................... "
7. A minute perusal of the above provision reveals that in order to attract the charging provision taxable supplies should be made by a person who is registered under the Sales Tax Act in the course or furtherance of any taxable activity. Term taxable supply has been defined in sub-section
(41) of Section 2 of the 'Act' as supply of taxable goods in Pakistan.
8. Since sales tax as payable on the value of supplies, therefore, it would be very material to determine as to whether the transaction between the appellant and is Principal falls within the ambit of supplies.
Supply as defined in sub-section (33) of Section 3 of the Sales Tax Act runs as follows:-- "(33) 'supply', includes sale, lease excluding financial or operating lease or other disposition of good in or furtherance of business carried out for consideration and also includes; .
(a) putting to private, business or non-business use of goods acquired,. Produced or manufactured in the course of business;'
(b) auction or disposal of goods to satisfy a debt owned by a person;
(c) possession of taxable ggods, held immediately before a person ceases to be a registered person; and;
(d) such other transaction as the Federal Government may, by notification in the official Gazette, specify;"
A supply which could attract charging of sales tax, in accordance with the definition, as reproduced above, can be visualized as follows:- -
(b) Lease;
(c) Other disposition of goods in or furtherance of business carried out for consideration;
(d) Putting to private, business or non-business use of goods, acquired, produced or manufactured in the course of business.
9. The transaction between the appellants and its Principal can by no stretch of imagination be termed as sate or lease as such it requires no deliberations. Now it is to be examined as to whether the transaction, as above, amounts to "other disposition of goods in or furtherance of business carried out for consideration". There can be no denial of the fact that the business of, the appellant is carried out for consideration, but the question which needs to be examined is as to whether the returning of goods by the appellants after processing would amount to "disposition of goods". The term "disposition" has not been defined in 'the Act' and the ordinary meaning of the word 'disposition' as defined in various Dictionaries are as under:-- '
Black's Law Dictionary (Sixth Edition) 'act' of 'disposing, transferring to the care or the possession of another. The parting with, alienation with, or giving up property.
Concise Oxford Dictionary (10th Edition). 'The action of disposing or transferring property or money to someone, in particular by bequest. The power to deal with something as one pleases'.
10.' The expression 'disposition' further was considered by the Supreme Court of India in the cases of Goii Eswa rian v. Commissioner of Gift Tax (AIR 1970 SC 1722) and it was held that.'the word.Disposition is not a term of law'. Further it has no precise meaning. Its meaning has to be gathered from the context in which it is used.
11. Since the word 'disposition' has not been defined in the 'Act' therefore the ordinary meaning of the word which is of wide connotation is to be adopted, It is used only as an expression of transfer inter vivos or by operation of law and for such purpose an element of ownership must exist upon the goods/property under disposition or at least the person acquiring the goods must possess some right or title in the goods in order to dispose it of at his will.
Consequently the returning of goods-cannot be included in the expression'disposition'of goods.12.
It brings us .To examine as to whether said transaction amounts to 'putting the goods acquired, produced or manufactured in the course of business to private, business or non-business use'. The expression 'manufacturer' has been defined in sub-section (16) of Section 2 of the Act which reads as follows:-- "Any process in which an article singly or in combination with other articles, materials, components is either converted into other distinct article or product or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process incidentally or ancillary to the completion of a manufactured product."
13. The processing of goods by the appellant surely is a manufacturing process. Howevef, the precondition to include the goods acquired, produced or manufactured in the course of business is the 'use' of the goods by the person who acquired, produced or manufactured the goods and in the present case the appellant did not use the goods to attract the consequences of supply.
14. In our opinion, the transaction, between the appellants and their Principal can safely be termed as a contract of bailment as defined in Section 148 of the Contract Act which is reproduced for the sake of convenience:-- "(148) "Bailment", "bailor" and "bailee' defined. A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall when the purpose it accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called, the "bailor". The person to whom they are delivered is called the "bailee"."
15. A perusal of the above provision of law reveals that the goods are delivered by the bailor (principal in this case) to the bailee (appellant in this case) for some specific purpose and the bailee is bound to return the goods to the bailor after accomplishment of the purpose for which the goods were delivered. As such returning of goods can by no stretch of imagination be termed as supply in order to attract the consequences of charging provisions.
16. However, in case, if the goods are disposed of by the bailee (appellants in the present case) at the instructions of the bailor (Principal in the present case) then, of course, such disposition of goods would amount to supply and would invite the consequences accordingly. However, in such eventuality, the supplier would be bailor and not the bailee and the purchaser would be the person to whom the goods are disposed of at the instructions of bailor.
17. Adverting to the case of Ambar Tobacco Company (Pvt.) Limited (supra) a demand was raised upon the petitioner in the light of STGO 1 of 1998 to pay sales tax on conversion charges received for manufacturing cigarettes from the raw material provided by the Principals. The petitioner challenged the demand before the Peshawar High Court. The Hon'ble Judges of Peshawar High Court while considering the meaning of supply as defined in sub-section (33) of Section 2 of the Act came to the following conclusion:- "It will be seen that supply is not confined to sale transaction but extends to other disposition of goods in. Furtherance of business carried for consideration, including manufacturing in the course of business."It was observed that since -the petitioners were manufacturing cigarettes in the course of business,therefore, were liable to pay sales tax on the value of supply diid not conversion charges. We have given our anxious consideration to the findings by the learned Division Bench of the Peshawar High Court. With all due deference and respect for the learned Judges, we are not able to persuade ourselves to accept that 'manufacturing in the course of business' could, by any stretch of imagination, be termed as supply as 'it is not the manufacturing which attract the charging provision but its sale, lease, disposition or use.
18. So far as the case of Messrs General Type and Rubber Company (Pvt.) Limited (supra) is concerned, we are in agreement with the following observation of a Division Bench of this Court:-- "From the above it is clear that much emphasis has been given by the legislature for levy of sales tax on the taxable supplies made in the course of or in furtherance of any taxable activity. Whereas in the present case the undisputed fact is that raw material was supplied by appellant to Diamond Rubber Mill and after its process, it was returned back to him. Thus, element of inclusion of sale tax is not appearing during this whole transaction, as processing activity, was carried out by Diamond Rubber Mill on the fixed processing charges as settled vide letter, dated ?
29.6.1999 with no factors of sale, lease or other disposition of goods, as embodied in Section 2(33) of Act or explained in Sales Tax General Order 1/98. Therefore, levy of sales tax under Section, 3 of Act, entitling a registered person to deduct input tax from the output tax, is not available to appellant."
19. The above discussions leave no room for any doubt that the transaction between the appellants and their principal, amounts to bailment and not a 'supply' as envisaged in Section 3 of the 'Act' therefore the conversion charges received by the appellant cannot be subjected to charging provision of the 'Act'.
20. For the foregoing reasons, we answer the question framed above by holding that no Sales Tax was payable by the appellant either on the value of goods returned to its principal or on the charges received for the conversion.
21. The logical consequence is that the Sales Tax Department has wrongly received the sale tax on conversion charges which is in the nature of consideration for providing services. The Department has no moral or legal justification to retain this amount paid by appellant on account of ignorance of law, which should be returned/refunded.