1. The instant appeal has been filed against Order-in-Appeal No.126 of 2011 dated 29-3-2011 passed by the Commissioner Inland Revenue (Appeals-I), Islamabad. The appellant filed the appeal on the following grounds:- (1.1) The Order-in-Appeal No.126 of 2011 dated 29th March, 2011 of the Commissioner Inland Revenue (Appeals-I), Large Taxpayer Unit, Islamabad is bad in law and against the facts of the case.
2. (1.2) That the CIR(A) is nut justified in appreciating the legal position that the Sales Tax Act, 1990 extends only to the whole of Pakistan; and the Article 1(2) of the Constitution of Pakistan do not cover the state of AJ&K under the territories of Pakistan.
3. (1.3) That the CIR(A) has observed that as the, activity originated from Pakistan and there being on explicit exemption under the Sales Tax Act to the supply of electricity hence is taxable activity, without appreciating the fact that the appellant's claim is export of electricity hence zero rated and not exemption under the Sales Tax Act. The case-law made basis for her views in this regard is distinguished on the facts of the case in hand hence is not applicable.
4. (1.4) That the CIR(A) is not justified in not appreciating the legal position that electricity supplied by the appellant to the AJ&K Government is to be treated as Exports under section 4 of the ST Act. The CIR(A) has observed that supply of electricity is not export while doing so she has based her views on the judgment of a higher court which again is distinguished on the facts of the case in hand hence is not applicable.
5. (.1.5) That the CIR(A) has misdirected himself by giving the remarks that the contention taken by the appellant regarding exports is an afterthought as the same was not reflected in the sales tax returns filed for the period in question without fully appreciating the Principal decision of the Chief Executive of Pakistan and the Ministry of Power and Water.
6. (1.6) That the CIR(A) has observed that in case the supply was export to AJ&K then there was no need to issue any clarification in this regard. The appellant understand that the wordings used to clarify the position are C.B.R. will not levy GST on electricity generated and supplied to AJ&K since GST is applicable to Pakistan and AJ&K already charges GST through their tax department hence also reflects the understanding that the AJ & K is a territory which has its own sales tax laws and is outside the domain of the ST Act of Pakistan.
7. (1.7) That the CIR(A) has erred on facts by observing that the contentions given by the appellant is self contradictory without fully appreciating various clarifications issued by the Government of Pakistan in this regard, which also give the same understandings as contended by the appellant.
8. (1.8) Without prejudice to the above grounds, the CIR(A) is not justified in directing to impose default surcharge and penalty as there was not wilful default of payment of sales tax by the appellant.
9. (1.9) That the appellant craves leaves to add, alter .or amend any grounds of appeal at the time of hearing of appeal.
10. 2.1 Facts of the case are that the appellant "Islamabad Electric Supply Company Limited" (for brevity "IESCO") is an unbundled entity of WAPDA, corporatized for the purposes of electricity and power distribution in the area of Islamabad and AJ&K. The Deputy Commissioner Inland Revenue (Audit-II)' Large Taxpayers Unit, Islamabad noticed that the IESCO made supply of electricity to the Government of Azad Jammu and Kashmir (for brevity "AJ&K Government") during the period commencing from July, 2008 and ended on June, 2010, without charging sales tax on the said supplies, while such supplies were claimed exempt consequently resulting into alleged suppression of sales tax to the extent of Rs.1,269,950,880. Since in the opinion of the Learned Deputy Commissioner Inland Revenue, the sales tax has been short levied therefore, the IESCO had contravened the provisions of sections 2(41), 3(1)(a), 3(3)(a), 6, 7, 8, 22, 23 and 26(1) of the Sales Tax Act, 1990.
11. 2.2 The appellant was show caused for contravening supra provisions vide C. No. LTU/ST/Audit/30/9/183 on 14th December, 2010. In turn the present appellant pleaded that the subject supplies were made under a valid agreement entered interse the Government of Pakistan and the AJ&K Government for raising Mangla Dam, wherein it has specifically been consented and agreed between both the Governments that no sales tax shall be charged on the supplies subject matter of the agreement nevertheless, it was pointed out that AJ&K being a foreign territory, the subject supply of electricity was "Export" amenable to charge of tax at the rate of zero percent in terms of section 4 of the Sales Tax Act, 1990.
12. 2.3 The contention raised by the appellant, at adjudication stage, did not find favour of the Learned Deputy Commissioner Inland Revenue, and the subject proceedings culminated into impugned Order-in-Original No. 11 of 2010 dated 31st December, 2010, whereby the appellant/ IESCO was directed to pay sales tax amounting to Rs.1,269,950,880 representing sales tax on supply of electricity to AJ&K Government for the period July, 2008 to June; 2010 along with default surcharge under section 34 and penalty under section 33 of the Sales Tax Act, 1990.
13. 2.4 The Learned Commissioner Inland Revenue (Appeals) heard and decided appeal against the Taxpayer, while concurring with the finding of the Learned Deputy Commissioner Inland Revenue vide impugned order dated 29th March, 2011, hence this appeal.
3. Several hearings took place. The learned counsel of the appellant contended, that the whole case revolves around the following formulation/issues which need serious consideration so as to resolve the controversy and the dispute interse Revenue and the appellant:--
(1) Whether the Azad Jammu and Kashmir territories fall within the territory of Pakistan, within the meaning of Article 1 sub-Article
(2) of Constitution of Islamic Republic of Pakistan, 1973.
(2) Whether the Electricity supplied by IESCO to Government of Azad Jammu Kashmir, under a valid agreement entered interse the Government of Pakistan and Government of Azad Jammu Kashmir is
(a) Taxable activity or taxable supply.
(b) Export.
(3) Whether the Electricity supplied by IESCO, under agreement entered interse the respective governments being export was subject to tax @ zero percent or were exempt supplies, notwithstanding that being not an item of Sixth Schedule to the Sales Tax Act, 1990.
(4) What is difference between taxable and exempt goods.
(5) Whether the agreement entered into by the respective governments, has any legitimate binding force and still requires further legislation for grant of exemption through Express Notification.
14. (3.1) The learned counsel of the appellant stated that the first formulation is of immense importance, for the reason, that the same revolves around determination of constitutional status of the Azad Jammu and Kashmir Territory. Whether the AJ&K is a foreign Territory or is a Territory annexed with Pakistan.
15. Article 1 sub-Article (2) 01 the Constitution of Islamic Republic of Pakistan, 1973 the said Article reads as under:-- "[(2) The territories of Pakistan shall comprise:
(a) the provinces of [Balochistan], the [Khyber Pakhtunkhwa], the Punjab and [Sindh];
(b) the Islamabad Capital Territory, hereinafter referred to as the. Federal Capital;
(c) The Federally Administered tribal Areas; 'and
(d) such states and territories as are or may be included in Pakistan, whether by accession or otherwise."
16. Perusal of the above would reveal the territory of State of Jammu and Kashmir do not, find place in the defined territories of Pakistan under the Constitution. I would like,to refer to clause (d) of Sub- Article (2) of Article (1) of .the Constitution which also includes such states and territories as are or may be included in Pakistan, whether by accession or otherwise. It is submitted that despite the fact that the area of Jammu and Kashmir state may be included subsequently in the territories of Pakistan by accession, or otherwise. Yet the fact remains that future is dependent on free democratic plebiscite in accordance with UN Resolution, territories, since have not expressly been mentioned in Article-I of the Constitution of 1973 the same may not fall in the context of otherwise included as well, untill decided by the people of Jammu and Kashmir state (please note that there is a distinction between Azad Jammu and Kashmir and Jammu and Kashmir State. The former only refers to liberated territories while later includes un-liberated territories of Jammu and Kashmir State)
17. It may not. let out of place that the territories of Pakistan has similarly been defined in the Late Constitution of Pakistan of 1962. In this context the matter came up for consideration firstly before the Supreme Court of Pakistan in re: Noor Hussain v. The State reported as PLD 1966 SC 88. The Full Bench of the apex Court of Pakistan observed as under at Page 93 (relevant Page 6 of paper book)
18. "Any territory which does not constitute part of the Republic of Pakistan and as defined in the Constitution of 1962, is a Foreign Territory."
19. The matter again came up for consideration before Supreme Court of AJ&K in re: Commissioner Income Tax AJ&K Muzaffarabad v. Messrs Haji Ali Khan and Co., Forest Lessee Havellian PLD 1964 SC
456. The learned Court at Page 66 (Page-12 of Paper Book) observed as under:-- ....It is correct as held by Justice Hamoodur Rehman, J. (as he then was) in Noor Hussain v. The State (1), that the Azad Kashmir territory which does not constitute part of the Republic of Pakistan as defined in the Constitution of Pakistan is a foreign territory. Nevertheless for all particular purposes, it has all the constitutional features of a Government. It has got its own Constitution, its own High Court and Supreme Court and, therefore, it is a Government for all practical purposes; and it matters little as to whether this Government is recognized by the Government of Pakistan or not.
20. Besides both the agreement referred to above were made by the representatives of the Government of Pakistan and the Government of Azad Kashmir. They specifically enters so.
21. Therefore, both the Governments or their representatives cannot wriggle out the agreement to avoid them. The principles of estoppel operates with full force against them.
22. The issue was again considered by Supreme Court AJ&K in the case of Federation of Pakistan v.
23. Malik Muhammad Maskeen and 8 others cited as PLD 1995 SC (AJ&K) 1.
24. The Income Tax Tribunal relying upon Noor Hussain case, in case cited as 1998 PTD (Trib) 1878 at Page-1892 (Paper Book Page-59) held as under:-- "It is correct as held by Justice Hamoodur Rehman, J. (as he then was) in Noor Hussain v. The State PLD 1966 SC 88, that the Azad Kashmir territory which does not constitute a part of the Republic of Pakistan as defined in the Constitution of Pakistan is a foreign. territory. Nevertheless for all particular purposes, it has all the constitutional features of a Government. It has got its own Constitution, its own High Court and Supreme Court and, therefore, it is a Government for all practical purposes; and it matters little as to whether this Government is recognized by the Government of Pakistan or not. Besides both the agreements referred to above were made by the representatives of the Government of Pakistan and the Government of Azad Kashmir. They specifically enters so. Therefore, both the Governments or their representatives cannot wriggle out the agreements to avoid them. The principle of estoppel operates with full force against them."
(24) For the foregoing reasons it is held that the Azad Jammu and Kashmir is a country outside Pakistan and, therefore, section 164 of the Income Tax Ordinance, 1979 has rightly been invoked by the assessing officer to which no exception can be taken. The appeal at the instance of assessee stands dismissed accordingly.
25. The Supreme Court of Pakistan in case reported as PLD 2005 SC 373 at Page 379 in re: Master Foam (Pvt.) Limited and others v. Government of Pakistan (relevant at Page 72 of Paper Book-A) held as under:-- ......that although the status of AJ&K has not been finally determined as is enunciated in the Constitution, yet the AJ&K has its own President, Legislature, Judiciary, which is different/independent from the President, Legislature and Judiciary of Pakistan, that both the Supreme Courts of Pakistan and AJ&K have already determined that the AJ&K is not part of Pakistan. For this purpose, reliance is placed on the case reported as Noor Hussain v. State. (PLD 1966 SC 88). Suffice it to say that neither learned Attorney General for Pakistan nor learned counsel appearing for the respondents disputed above assertion of learned counsel for the appellant. As such, it cannot be said that territory of AJ&K is a part of Pakistan.
(28) Thus, the goods were imported into Pakistan by the appellants when they entered the territory ,of Pakistan and became liable to taxation accordingly. It is immaterial that ultimately they were to be transported to AJ&K. This is for the reason that import into Pakistan is a distinct taxable event independent of any even following thereafter.
26. Finally AJ&K Supreme Court in case reported as Messrs Jabeer Hotel Mirpur v. Kashmir Council of Islamabad cited as 2001 PLC (C.S.) 11 relevant Pages 21 and 22) held as under:--
(23) According to the Constitution of Pakistan and Azad Jammu and Kashmir Interim Constitution Act, 1974, Azad Jammu and Kashmir is not a part of Pakistan and laws of Pakistan are not applicable to the liberated territory of Jammu and Kashmir. Thus the functionaries appointed under a particular law which is in force in Pakistan do not have the jurisdiction to function in Azad Jammu and Kashmir.
27. 3.2 With regard to the learned counsel of the appellant stated that two Governments viz (i)
28. Government of Pakistan through its representative viz Secretary Ministry of Power (ii) the Azad Government of the State of Jammu and Kashmir, through its Chief Secretary, along with (iii)
29. Chairman, Water and Power Development Authority Lahore, entered into an agreement on 27th June, 2003 for raising of Mangla Dam. It is important that Government of Pakistan through this agreement on the first instance acknowledge the State of Azad Jammu Kashmir as an independent state. It was agreed as per clause 3.1 of the Agreement supra, that the Government of AJ&K shall make available land required for the raising of Mangla Dam for perpetual use by the Ministry for the said purpose, subject to the condition that the Government of AJ&K shall retain proprietary rights over such land. Under clause 3.2 Wapda was made liable to pay land compensation to the new effectees at the market rate plus 15% acquisition charges, in accordance with Land Acquisition Act, 1894 as enforced and adopted in the territory of the AJ&K Government.
30. Clause 4 of the Agreement deals with relief packages for the new effectees, which includes that rehabilitation, compensation and settlement and implementation of such compensation package under a committee constituted under the agreement.
31. Clause 5 of the agreement squarely deals with Power Sector, settlement of claims against each other, fixation of sale rate of electricity for AJ&K, subsidy, picking up of additional liability, power tariff for AJ&K to be fixed by Government of Pakistan, GST, assignment of responsibility of distribution of power to AJ&K Government, construction of grid stations and associated transmission lines, hydel profit/water , usage charges (royalty) from Mangla Dam.
32. It is important to point out here that under clause 5.3, it has specifically been agreed that the Ministry shall ensure that C.B.R. shall not levy the General Sales Tax on electricity generated in and supplied to the AJ&K, since GST is applicable in Pakistan and the AJ&K already charges GST through their tax department. All rules prescribed by the Government of Pakistan with respect of GST would be applicable to the Government.
33. The agreement ensures non-levy of sales tax on the electricity supplied by the appellant to Government of AJ&K. The tri-party agreement, between two independent governments is a treaty which has legal efficacy and sanctity. The parties are abide by the clauses of the contract. The agreement/treaty has to be implemented in letter and spirit for the reason that the same has not only been entered into by two governments bearing sovereign guarantee. Therefore, the same being for legitimate purpose and consideration, has to be implemented in letter and sprit, notwithstanding any amendment in the relevant law. The provisions need implementation, in the Islamic polity. The law is very clear on the point. It is important to state here that clarification and directions were issued to the appellant by competent authority for non charging of sales tax on the subject electric supplies and the CIR (A) has made reference thereto, ignoring the substance of agreement and had taken a leap in the dark. The Karachi High Court in case reported as 2001 YLR 2240, has enshrined the principle that "parties to a contract must perform their respective promises, unless excused by the provisions of the contract".
34. The Supreme Court of Pakistan in case reported as PLD 2010 SC 837 held at Page 872 of the report that "Promises, representation and commitments made by State and Government are always meaningful, serious, credible, responsible, solemn and somber". It was further held that "such representations, promises, commitments and assurances cannot be perpetual, meaningless and serious, non commercial, fraudulent or purposeless.
35. The Quetta High Court in case reported as 2002 PTD 967 at page 971 of the report held "where government functionaries made promises and representation to any one, who believed and acted under them, then such functionaries would be precluded from acting to the determent of such person".
36. Examining the agreement under reference as the touch stone of the principles laid down. by the superior courts, the agreement bears a promise, consent, competency to enter into agreement on behalf of sovereign states by its authorized functionaries and representatives, ensuing that sales tax shall not be levied by C.B.R. on the electricity supplied to the AJ&K Government, which was the subject matter of the agreement. Therefore, this agreement being somewhat in the nature of a treaty signed by two governments, has to be implemented and there was no need to bring change in any respective fiscal statute, viz. Sales Tax Act, 1990 or and issue notification in this matter in the like manner of "Avoidance of Double Taxation Treaties between states. The agreement is basically founded on reciprocation. Azad Jamu and Kashmir Government does not charge sales tax on supplies of electricity made to Pakistan and produced in Mangla Dam territory falling within AJ&K.
37. Nevertheless the appellant has acted upon the agreement bonafidely in letter and spirit. Therefore, now exception can be taken in this behalf. In case of a treaty between independent governments, it is essential principle that in case of any conflict between the clauses of treaty competently signed and a governing fiscal statute, the provisions of the treaty have to be prevailed upon. Therefore, the agreement having been competently legitimately and validly been entered by the representatives of two States, the same has to be complied with in its true perspective and no exception can be taken thereto.
38. So long as appellant is concerned it has reciprocated and implemented the agreement bonafidely and no exception can be taken so as to charge sales tax on the electricity supplies under the said agreement. It is, worthwhile to point out here that since inception of agreement, no sales tax was being charged on such electric supplies from both sides and were never questioned, objected or appellant was asked to charge, but for the period under appeal alone. The deviation is thus not only based on presumption but also against and contrary to the dictates of the settled norms of administration of justice and the agreement itself. The conduct of the revenue in the past proves that they have admitted to the contents of agreement, but suddenly, now they have taken a "u- turn" Having explained the validity and sanctity of the agreement, it is submitted that taxable goods have been explained in section 2(39) of the Sales Tax Act, 1990 to mean all goods other than those which have been exempted under section 13. This means that all the goods other than those specified in terms of section 13 shall be reckoned as taxable goods. It is important to point out here that goods can be reckoned and classified as tangible and intangible goods. So long as electricity is concerned the same fall under the later category.
39. 3.3 With regard to the third formulation, the learned counsel contented that the taxable supply has been defined under section 2(41) of the Sales Tax Act, 1990 to mean a supply of taxable goods made by an importer, manufacturer, whole seller (including dealer), distributors or retailer other than an supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax @ 0% under section 4.
40. 3.4. Turning to the next formulation the learned counsel argued that there is a difference between taxable and exempt supply. It was contended that all the goods are taxable goods with the exclusion of goods specified and declared to be exempt under section 13 of the Sales Tax Act, 1990 and this is the only difference which leads to the conclusion that any goods which are specified in section 13 shall not be taxable goods. It is important that in case of taxable goods, the principle of output minus input tax adjustment shall be applicable as has been held by the Sindh High Court Karachi in a recent judgment reported as PTCL 2011 CL 235.
41. 3.5 Formulation No.5 is the same as formulation No.2.
4. The learned counsel for the respondent made his presentation as under:--
(1) That the appellant supplied electricity to Azad Jamu and. Kashmir hereinafter referred as AJ&K without charging of Sales Tax amounting to Rs.1,269,950,880 during the period from July 2008 to June-2010. Whereas appellant was required to charged and paid Sales Tax under section 3 of the Sales Tax Act, 1990.
(2) That the time of filing of Return the contention of the appellant was that, the supply of electricity to AJ&K is exempt under section 13 of the Sales Tax Act, 1990. So the appellant declared exempt supplies in their monthly Sales Tax Returns during the aforesaid period.
(3) That at the time of first hearing before the adjudicating officer, appellant submitted some agreements, minutes of the meetings etc. for establishing the fact that supplies made to AJ&K are exempt under section 13 of the Sales Tax Act, 1990. But after detail discussion with adjudicating officer, the appellant changed their version and submitted their written reply with the contention that supplies made to AJ&K are Exports and chargeable to Sales Tax @ Zero percent.
42. 4.1 Status of AJ&K and Taxable Event That contention of the appellant regarding status of the AJ&K as an independent state is irrelevant in the instant case. It is correct, Sub-Article (2) of Article 1 of the Constitution of Islamic Republic of Pakistan, 1973 defines the territories of Pakistan but I has not any relevancy with the case of appellant.
43. That under subsection (1) of section 3 of the Sales Tax Act, 1990 a registered person is liable to charge and paid sales tax of the value of taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him. As per subsection (3)(a) of section 3 of the Sales Tax Act, 1990, the liability to pay the sales tax shall be in the case of supply of goods, of the person making the supply. So it is without any shadow of doubt, sales tax shall be charged levied and paid on taxable event, it is immaterial, whether Sales Tax Act, 1990 has been extended to or adopted by the AJ&K. The taxable event is supply of goods, which has nothing to do with their onward shipment to an area whether settled area, tribal area or outside the Pakistani territories.
44. Once the goods are supplied, they are liable to be taxed under the Act. The Hon'ble Peshawar High Court in the case of Lal Ghee Mills reported in 2010 PTD 438 has answered the same question. The Hon'ble Supreme Court of Pakistan in the case of Master. Foam answered the same question of law <u>"Whether the Customs Act, 1969 and the Sales Tax Act, 1990 are not applicable to the territories of AJ&K and the goods in transit are not subject to payment of tax? (1542) para A. </u> (see para. 3 II of the judgment and also see paras. 13 to 17) 2005 PTD 1537.
45. 4.2 Legality of Exports That the constitution of the appellant regarding supply of electricity to AJ&K is to be treated as Exports under section 4 of the Sales Tax Act, 1990 is without any legal backing. It is pertinent to mention here that appellant has declared their sales in their monthly sales tax returns as exempt sales. It is pertinent to mention here that as per subsection (2) of section 8 of the Sales Tax Act, 1990, if a registered person deals in taxable as well as non-taxable supply he can reclaim only such proportion of the input tax as is attributable to taxable supplies. Due to the said reason appellant changed their stance and claimed that the supplies made to AJ&K are zero rated exports. It is without any shadow of doubt the contention of exports is second thought of the appellant.
46. 4.3 That the appellate Tribunal in 2002 PTD (Trib) 2764 held that "The Export is not lawful when it is made to buyers in the State of AJ&K without complying detail procedure prescribed under the law".
47. 4.4 That the Hon' able-Lahore High Court held in 1998 PTD 2561 "The territory of AJ&K is under the government and control of Government of Pakistan and unless specifically accords exemption to the goods imported through Pakistan from the charging of sales tax, such goods will be levy of ST".
48. 4.5 That section 3 of Export Policy Order, 2008 defines basis for export as under:- "Basis for Export" Export from Pakistan shall be made under the foreign exchange rules, regulations and procedure notified by the State Bank of Pakistan from time to time and upon submission of such documents as may be prescribed".
49. It is pertinent to mention here that definition of Export and smuggling are same but the main difference between the both is documentation of exports. As per Section 2(s) of the Custom Act, 1969 Smuggle" means bring into or take out of Pakistan. It means the goods take out from Pakistan without fulfill the requirements as required under the Imports Exports Control Act, 1950 called smuggling of goods not the export of goods."
50. 4.6 That as per sections 130 and 131 read with section 50 of the Customs Act, 1969 no goods to be loaded on a conveyance, till entry outwards or permission granted. If the supply of electricity to AJ&K considered as export on the request of appellant it will as a reflex action comes under the definition of smuggling.
51. 4.7 Supply made by or to AJ&K under the Sales Tax Act, 1990 Section 61A of the Sales Tax Act, 1990 is about repayment of tax to person registered in AJ&K. Under this section Sales Tax Registered persons of AJ&K has a right to reclaim or adjust input tax paid at the time of purchases or imports.
52. 4.8 The Government of Pakistan (Revenue Division) Federal Board of Revenue through S.R.O.
53. 1295(1)/2008 issued under Section 61A of the Sales Tax Act, 1990 framed Rules for repayment of Sales Tax to Person registered in AJ&K. As per Rule 2 of said Rule "The AJ&K registered persons shall be entitled to receive repayment of input tax paid on any goods acquired in or imported into Pakistan as in excess of output tax declared in their respective monthly returns, provided such input tax relates to their supplies which are either zero-rated or are exported outside Pakistan against Pakistan Customs Goods Declaration.
54. 4.9 That under the provision of subsection 14(e) of section 2 of the Sales Tax Act, 1990 "input tax means, levied under the Sales Tax Act, 1990 as adapted in the State Bank of AJ&K on the supply of goods received by the person.
55. 4.10 The Sales Tax General Order No.18 of 2010 dated 10th May, 2010 also provide procedure for input tax adjustment to Pakistani registered persons against their purchases from AJ&K 4.11 Without Prejudice it is respectfully submitted that if the contention of the appellant accepted it will open a new door for fake and flying exports and it will be easy for every one to register in the AJ&K under the provisions of Sales Tax Act, 1990 as adapted in the State of AJ&K and getting illegal and fake refund from Pakistan. It is pertinent to mention here that AJ&K purchases goods from Pakistan worth millions of Rupees on daily basis and all supplies from Pakistan shall become exports and entitled for refund. So as discussed in details supplies made to AJ&K are not zero rated nor exports under section 4 of the Sales Tax Act, 1990.
5. Judgment 5.1 We have carefully considered the valued contentions of the appellant and the respondent. The learned counsel for the appellant explained the historic background of the present constitutional status of AJ&K. He recalled that the State of AJ&K emerged as a result of a tripartite agreement called Karachi accord entered in March, 1949 between the Government of Pakistan, the Government of AJ&K and Muslim Conference of AJ&K. It was a unique arrangement based on the free will of all parties to the Karachi accord. The constitutional status of AJ&K as a territory outside Pakistan is undisputed in view of Article 1(2) of Constitution of Islamic Republic of Pakistan and the judgments of the Supreme Court of Pakistan in Noor Hussain v. The State reported as PLD 1966 SC 88, CIT AJ&K v. Haji Ahmed Khan reported as PLD 1964 SC 456, Malik Miskeen reported as PLD 1995 SC (AJ&K) 1 and Master Foam reported as PLD 2005 SC 373, affirmed this position. This is a settled issue and the Tribunal cannot enter an opposite view in this regard.
56. 5.2 Arguing against the levy of GST on electricity supplied by IESCO to AJ&K, the IESCO's Counsel stated that the Government of Pakistan and the Government of AJ&K entered into an agreement namely, the agreement for raising of the Mangla Dam on 27th June, 2003. It's clause 5.3 provides interalia, as follows:-- "5.3 The Ministry shall ensure that the C.B.R. does not levy the GST on electricity generated in and supplied to the AJ&K since the GST is applicable in Pakistan and the AJ&K already charges GST through their tax Department. All rules prescribed by the Government of Pakistan with respect to the GST would be applicable to the Government."
57. We have perused the aforesaid agreement, we find that an explicit agreement exists between the two governments whereby, the Ministry of Water and Power of the Government of Pakistan has pledged itself to ensure that the C.B.R. does not levy GST or electricity generated and supplied to AJ&K. The learned counsel of the respondent questioned the maintainability of this agreement on the ground that this agreement was never given a legal effect as no notification in this regard under section 13 of the Sales Tax Act, 1990 was issued by the C.B.R. In our opinion after the execution of this agreement, it was the contractual obligation of the Ministry of Water and Power to secure a notification of D exemption of electricity supplied to AJK, which was not fulfilled by it. Whether, the agreement was given effect through S.R.O. or not is immaterial. The C.B.R. is as much bound by the agreement as the Ministry of Water and Power itself. Both the Ministries are parts of Federal Government and an agreement entered by the Federal Government is binding on the entire federation. Therefore, we have no doubt in our minds that the agreement executed by the Government of Pakistan with another Government is sacrosanct and is legally enforceable per ser no matter whether an S.R.O. to give it legal effect was issued or not. The tax treatment of supply of electricity to AJ&K shall be governed by the aforesaid agreement and there is no escape therefrom due to technical reasons, whatsoever. The agreement in question came in force as soon as it was executed. Neither, the AJ&K Government ever charged GST on its supply of electricity to Pakistan nor any power distribution company in Pakistan charged GST on its supply of electricity to AJ&K from 2003 to 2010. The case at hand involving F.B.R's claim of GST on electricity supplied by IESCO to AJ&K is the first of its kinds, in tax relationship between the two governments. Admittedly, the AJ&K Government does not charged GST on electricity supplied to Pakistan because it owns its contractual commitment under the aforesaid agreement. As long as the agreement is in place, the Government of Pakistan or any of its instrumentality cannot unilaterally go back on its covenant not to levy GST on electricity supplied to. AJ&K. Needless to mention that contracts are executed to be implemented in letter and spirit and a contract cannot be unilaterally revoked or nullified by either party as long as it exists. Absent any evidence of the extinction or revokation of the contract in question, this Tribunal determines that the treaty between the Government of Pakistan and AJ&K is legally enforceable and levy of GST on electricity supplied by IESCO to AJ&K is without lawful authority.
58. 5.3 There is a consensus among parties to the case that the supply of electricity to AJ&K is a taxable supply and we do not have a different view in this regard. This means that the supply of electricity to AJ&K would have been chargeable to GST, if there had been no contract or treaty between the Government of Pakistan and the Government of AJ&K, saying that GST shall not be charged inter se.
59. 5.4 Further the learned counsel of the appellant claimed that the supply of electricity to AJK was an export and thus entitled to zero rating under section 4 of the Sales Tax, 1991. The learned counsel of the respondent argued that the export is governed by section 131 of the Custom Act, 1969 read with section 3 of the Import and Export Control Act, 1951 and section 3 of the Export Policy Order, 2008. He further stated that the appellant neither complied the prescribed procedure for exports nor declared the supply in question as export in their sales tax return.
60. In our opinion the learned Counsel of the respondent has made a good case against the appellant's claim of export. We find that the supply in question is clearly outside the ambit of export as the procedure for export was not followed by the appellant. The appellant never claimed the supply in question as export and in their sales tax return declared their supply of electricity to AJ&K as "exempt supply". A transaction does not become export just because some one claims to have made an export. Export is not a word of month but a series of actions done under the legal framework governing export. Therefore, we declare that the supply of electricity to AJ&K cannot be characterized as export and the benefit of zero rating shall be inadmissible.
61. 5.5 We conclude that the supply of electricity was exempt by virtue of agreement between the two governments, containing a binding commitment that the parties to the agreement or treaty shall not levy GST on electricity supply to each other. In the end we like to state it clearly that this appeal has succeeded because of the existence of an agreement or treaty between the two governments and the findings contained herein do not apply to normal trade or supply transactions between Pakistan and AJ&K.
62. This order consists of (13) pages each singed and bearing the Tribunal's seal.