JUDGMENT: MR. ZIA-UD-DIN KHATTAK, MEMBER (JUDICIAL).--(1). An audit team of the Directorate of Audit Revenue Receipts, Lahore (as reported to the Assistant Collector, Sales Tax, Peshawar) pointed out that according to SRO. 1307(1)/97 dated 20.12.1997, a registered person was not entitled to reclaim or deduct the input tax paid on goods which are not direct constituent and integral part of the taxable goods produced, manufactured or supplied. However, on audit of the record of M/s. PEL Appliances Limited, Industrial Estate, Gadoon Amazai (hereinafter called as appellants) it was observed that the unit during February 1998 had reclaimed input tax credit paid on the import of machinery spares and thereby caused short realization of sales tax amounting to Rs, 86435/- and additional tax of Rs, 84700/- (upto 15.06.1999). Accordingly, a demand-cum-show cause notice No, ST(Audit)61/99/4856 was issued for deposit of the tax due and date of hearing was fixed on 08.06.1999 which was subsequently adjourned to 16.06.1999 and 28.06.1999. On final date of hearing, S.M. Ameer, Manager Accounts of the unit appeared and submitted written reply to the show cause notice. The Assistant Collector Sales Tax, Peshawar after hearing the parties held that SRO. 1307(1)/1997 had excluded spares, machinery and lubricants being items which were not direct constituent or integral part of the goods produced, manufactured or supplied in taxable activity and, therefore, vide Order-in-Original No, 29/1999 dated 20.10.1999 (communicated on 26.10.1999) directed the unit to deposit Rs, 86435/- as principal amount of sales tax alongwith additional tax amounting to Rs,121581/- (upto 15.10.1999). The order-in-original was upheld by the learned Collector (Appeals), Northern Zone, Rawalpindi vide consolidated Order-in-Appeal No, P/98 dated 27.08.1999 (whereby beside this case, 13 other appeals of similar nature were also disposed of).
3.Feeling aggrieved of the Order-in-Appeal, the unit filed this appeal under section 46 of the Sales Tax Act, 1990 (hereinafter referred to as the Act) mainly on the following grounds:-- (a)That the show cause notice even if read with the annexures does not give the actual date or month in which the short payment actually arose. It may be pointed out that even if it be presumed that input tax was claimed in the Return of February, 1998 it does not mean that short-payment was in the month of 2/98; (b)That the SRO.1307(I)/97 dated 20.12.1997 has been interpreted in such a way that the conditions laid down in the Sales Tax Act, 1951 for the benefit of refund of input tax, have been imposed. This amounts to amend the Sales Tax Act, 1990 which the Legislature never intended because this would amount to abdication of the function of Legislature. If the interpretation laid down by the Audit observation is held to be correct then the SRO.1307(I)/97 will become void ab-initio. The SRO.
1307(1)/97 is contrary to the scheme of the Sales Tax Act, 1990. Machinery is constituent and integral part of the production; (c)That the SRO. 1307(1)/97 does not specify the goods as required under section 8(1)b of the Sales Tax Act, 1990; (d)That the Federal Government realized the illegality of SRO. 1307(1)/97 and issued SRO. 578(1)/98 dated 12.06.1998 in supersession of SRO. 1307(1)/97.
4.Mr. Tariq Najib Chaudhry, Advocate, learned counsel for the appellant-unit reiterated the above grounds of appeal and argued that the DRRA is branch of Auditor General of Pakistan which can only audit the receipt of Federal Government and not the record of private enterprises/industrial units, therefore, the case based on audit observation of DRRA is unlawful. Conversely, the representative of the respondent- department opposed the appeal.
5. I have heard learned counsel for the appellant-unit representative of the respondent department and perused the record.
6.This case relates to the claim of input tax paid on the import of machinery spares. The case involves three (03) main issues which are as under:-- "(a)Whether the DRRA which is a branch of Auditor General of Pakistan could audit the record of industrial units? If not, with what effect?
(b)Whether SRO 1307(1)/97 dated 20.12.1997 was in conflict with the provisions contained in sections 7(1) and 8(1)(b) of the Act?
(c)If the answer to issue (b), is in affirmative, whether the statutory provisions contained in sections 7(1) and 8(1)(b) of the Act shall prevail over SRO. 1307(1)/97 and whether the learned Collector (Appeals), Northern Zone, Rawalpindi is mis-directed in upholding the recovery of input tax claimed along with imposition of additional tax under the provisions of the Act."
7. I proceed to take up issue-(a) first because the result ensuing therefrom will affect the case on legal plan. It is observed that in the instant case, the audit was conducted by audit party of DRRA, Lahore which is the staff of Directorate General of Revenue Receipts Audit. It is a branch of Auditor General of Pakistan and its officers are neither sales tax officers under section 30 of the Act nor they are authorized under the Sales Tax Rules, 2005 to have access to premises and accounts of any registered unit. They do not even fall in the category of officers mentioned in section 25 of the Act in the execution of the aforesaid Act. Staff of DRRA is non-existent authority as for private registered units are concerned and they cannot have access to their books of accounts and other record under the sales tax laws. Their charter of function is given in Notification No, SRO. 1195(1)/90 dated 17.12.1990 which reads as under:-- "In exercise of the powers conferred by clause (a) of sub-paragraph (2) of paragraph 11 of the Pakistan (Audit and Account) Order, 1973 (President's Order No, 21 of 1973), and in supersession of this Division Notification No, S.R.O. 800(1)/87 dated the 6th October, 1987, the President is pleased to require the Auditor-General of Pakistan to Audit the receipts of the Federal Government falling under the following Heads, namely:--
(a) 0110000 Taxes on Income
(b) 0120000 Property and Wealth Tax
(c) 0140000 Capital Gains Tax
(d) 0160000 Workers Welfare Tax
(e) 0170000 Tax on professions, Trades and Callings.
(f) 0180000 Capital Value Tax
(g) 0210000 Customs
(h) 0220000 Sales Tax
(i) 0230000 Federal Excise
(j) 0240000 Federal Excise on Natural Gas
(k) 0290000 Other Indirect Taxes The results of audit shall be included in the report to be submitted by the Auditor-General of Pakistan to the President".
It becomes clear from the perusal of above notification that the President of Pakistan has required the Auditor General of Pakistan to audit the receipt of Federal Government and not the record of the private enterprises/industrial units licensed/registered under the Sales Tax Laws. Thus the whole exercise conducted by the DRRA in this particular case is quorum-non-judice.
8.As regards, issues (b) & (c), the learned counsel for the appellant-unit argued that under section 8(1)(b) of the Act, the Federal Government is empowered to issue a Notification specifying the goods in respect of which a registered person shall not be entitled to reclaim or deduct input tax but it is not empowered to issue the Notification in general terms. He invited attention that the Federal Government has been issuing Notifications under section 8(1)(b) of the Act before and after the issuance of SRO. 1307(I)/97 and a comparison of this Notification with earlier and subsequent Notifications shows that except SRO. 1307(1)/97 in all other Notifications, the goods were specified in respect whereof a registered person was not entitled to reclaim or deduct input tax. He submitted that it is indicative of the fact that the SRO. 1307(1)/97 is not in conformity with the mandate conferred on Federal Government by the Legislature and is in conflict with the substantive statutory provisions of section 8(1)(b) of the Act and thus the Notification is ultra vires.
Conversely, representative of the respondent-department supported the impugned Order-in- Appeal and submitted that the machinery spares are not direct constituent and integral part of the taxable goods and, therefore, the Appellate Authority had rightly held that the appellant-unit was not entitled to claim input tax paid on such machinery parts.
9. I have considered the contention of the learned counsel for the appellant-unit, representative of the respondent-department and carefully read sections 7 & 8 of the Act. In order to appreciate the case in its proper perspective, it would be appropriate to reproduce the relevant portion of the law and Notifications:-- Section: (8) of the Sales Tax Act, 1990:-- "Tax Credit not allowed.--(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on-- (a)the goods used or to be used for any purpose other than for taxable supplies made or to be made by him; (b)any other goods which the Federal Government may, by a notification in the official Gazette, specify."
"Notification No, SRO. 556(1)196, dated 1st July, 1996.--In exercise of the powers by clause (b) of sub- section (1) of section 8 of the Sales Tax Act, 1990, the Federal Government is pleased to specify the goods detailed in column (2) of the table below, on which a registered person shall not be entitled to claim input tax credit if such goods are purchased by him for use in registered office or the business premises.
Sr.No. Description Heading of the First Schedule to the Customs Act, 1969 (IV of 1969)
(1) (2) (3)
1. Vehicles. Respective headings of Chapter 87.
2. Consumer durables of the House - hold type such as Air conditioners (window type or split).
Refrigerator's, microwave ovens, deep-freezers and other household appliances"
"Notification No, S.R.0.1307(I)/97.--In exercise of the powers conferred by clause (b) of sub-section
(1) of section 8 of the Sales Tax Act, 1990, and in suppression of its notification No, S.R.O. 556(I)/96, dated the 1st July, 1996, the Federal Government is pleased to direct that a registered person shall not be entitled to reclaim or deduct the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied, during the course, or in the furtherance, of any taxable activity."
"Notification No, S.R.O. 578(0/98.--In exercise of the powers conferred by clause (b) of sub-section
(1) of section 8 of the Sales Tax Act, 1990, and in supersession of Ministry of Finance and Economic Affairs' Notification No, S.R.O. 1307(1)/97, dated the 20th December, 1997, the Federal Government is pleased to specify that the following goods acquired otherwise than as stock in trade by a registered persons to be the goods in respect of which input tax shall not be claimed, namely:-- (1)Vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969 (IV of 1969).
(2)Building materials.
(3)Office equipment (excluding electronic fiscal cash registers), furniture, fixture and furnishings.
(4)Electrical and gas appliances.
(5)"Telecommunication equipment's. (6)Generators and generating sets.
(7)Wires and cables and ordinary electrical fittings. (8Crockery, cutlery and utensils, etcetera.
(9)Supply of food, beverages, garments, fabrics, etcetera and consumption on entertainments.
(10)Gifts and give-aways."
10.On reading of the sections 7 & 8 of the Act, the following position emerges:--
(i) A registered person shall be entitled to deduct input tax paid for the purpose of taxable supplies made or to be made by him from the output tax, that is due from him in respect of that tax period; (ii)The registered person shall not be entitled to reclaim or deduct input tax paid on the goods used or to be used for any purpose other than for taxable supplies made or to be made by him; (iii)A registered person otherwise entitled to reclaim or deduct input tax paid for the purpose of taxable supplies made or to be made by him from the output tax, shall not be entitled in respect of any goods, which the Federal Government may by a notification in the official Gazette specify.
11. The provision contained in section 8(1)(b) is in the nature of exception to the general rule contained in section 7 read with section 8(1)(b) and section 10 of the Act. Under this provision, the Federal Government has been delegated the power to specify the goods which otherwise qualify for input tax, thereby excluding them from the admissibility of input tax. However, it does not empower the Federal Government to create a new class of goods in general terms thereby excluding the whole class of such goods from the claim of input tax. The provisions of law which are in the nature of exception shall not override the substantive provision but shall merely operate to the extent of making exception to the general rule. Now, while examining the provision contained in SRO/1307(1)/97 dated 20.12.1997, I find that the Federal Government had disentitled registered person from reclaiming or deducting the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced manufactured or supplied during the course or in furtherance of any taxable activities. There is apparent conflict between this SRO and the provision contained in section 7(1) of the Act which entitles the registered person to deduct input tax paid for the purpose of taxable supplies made or to be made. The substantive provisions in section 7 does not contain that only such input tax shall be reclaimed or deducted which is paid on the goods which are direct constituent and integral part of the taxable goods produced, manufactured or supplied.
12. It is observed that the legislature has itself given entitlement to a class of goods in respect whereof input tax can be reclaimed or deducted and has further specified a class of goods, the payment of tax whereon, shall not be allowed to be reclaimed or deducted from the output tax. The legislature has not empowered the Federal Government to create any other class of goods in general terms excluding the same from the purview of reclaim or deduction of input tax. It has merely empowered the Federal Government to specify meaning thereby, to mention particularly or determine the specific goods which otherwise entitle the registered person for re-claiming or deducting input tax, to exclude from such concession. Thus, creation of new class of goods in general terms disentitling the registered person from reclaiming or deducting input tax paid on such goods is not in consonance with the substantive provision contained in section 8(1)(b) of the Sales Tax Act. It is manifestly beyond the authority delegated to the Federal Government by the legislature. A perusal of the SRO. 556(I)/96 dated 1.7.1996 which was superseded by SRO. 1307(1)/97 and Notification No, S.R.O. 578(1)/98 dated 12.06.1998 which superseded Notification No, SRO.
1307(1)/97 shows, that the Federal Government specified goods in respect of which a registered person was not entitled to claim input tax. Besides, the issue in hand is not new. It has been discussed (and adjudicated upon) at higher judicial forums. The Federal Government, in order to give effect to judgments of these fora (whereby, under purposive approach, a liberal interpretation was given to the provisions of section 8 of the Act) rescinded SRO. 1307(1)/97 dated 20.12.1997 vide SRO. 578(1)/98 dated 12.06.1998. The latter has been time and again amended during the years 1999-2003 and ultimately rescinded. The new SRO. 490(1)/2004 dated 12.06.2004 reduced the negative list from Ten (10) items to just three (3) namely Vehicles (Chapter 87), G food/beverages/garments and gifts. The said short listing was understandably done by the Federal Government to broaden the scope of input tax adjustment thereby giving full play to the provisions of section 8(1)(a) of the Act under which input tax adjustment is permissible in relation to any item used or to be used for purpose of making a taxable supply.
13. In this view of the matter, it is held that SRO. 1307(1)/97 dated 20.12.1997 is in conflict with the provision contained in sections 7 and 8(1)(b) of the Act. It is further held that because of such conflict, the statutory. provision contained in the said sections shall prevail over SRO. 1307(1)/97 in pursuance of the principles laid down by the august Supreme Court of Pakistan in case reported as 1999 SCM R 1442. It is also held that the machinery parts on which input tax was paid by the appellant-unit were used for the purpose of taxable supplies and thus the appellant being registered person was entitled to take input tax paid from the output tax paid while determining its tax liability, as these goods not specified in any notification issued under section 8(1)(b) of the Act including SRO.1307(I)/97 dated 20.12.1997 were not excluded from the entitlement of deduction of input tax.
14.In the result, I accept this appeal, set aside the impugned Order-in-Appeal No,P/98 dated 27.08.1999 passed by the learned Collector (Appeals), Northern Zone, Rawalpindi and vacate the Order-in-Original No,29/1999 dated 20.10.1999.