JUDGMENT [The judgment of the Court was delivered by G.M. Kourejo, J.]- The following questions have been referred to this Court in Sales Tax References Nos. 65 (assessment year 1956-57), 69/72 (assessm ent year 1959-60) and 71/72 (assessment year 1957-58) under Section 17 (1) of the Sales Tax Act:-
(1) Whether the Tribunal is right in holding that raw material consumed in manufacture of cloth and of yarn is liable to sales tax under the Sales Tax Act, 1951?
(2) Whether in the facts and the circumstances of the case the Tribunal is right in holding that raw material for the manufacture of cloth exported is yarn and not cotton?
In Sales Tax References Nos. 66/72 (assessment year 1955-56), 67/72 (assessment year 1960-61) and 68/72 (assessm ent year 1958-59) the following question has been referred "Whether the Tribunal is right in holding that raw material consumed in the manufacture of yarn exported is liable to sales tax under the Sales Tax Act, 1951."
2. The facts are identical in all the above-mentioned references. We, therefore, dispose of them by this common order.
3. The applicant/assessee is a manufacturer of textile goods including yarn and cloth. Some of these goods are exported. In the original assessments the Sales Tax Officer taxed cotton as raw material consumed in the manufacture of exported goods. Subsequently, the assessments were reopened under subsection (2) of Section 28 of the Sales Tax Act for revising the value of raw material consumed as it was held to be yarn in respect of cloth exported and ginned cotton in respect of the yarn exported. The matter was taken in appeal before the Appellate Assistant Commissioner, Sales Tax, who dismissed the appeals of the appellant-assessee with the result that appeals were filed before the Income Tax Appellate Tribunal. The Tribunal also dismissed the appeals of the appellant-assessee with the result that the assessee have come in these references.
4. We have heard both Mr. Ali Athar, the learned counsel for the assessee and Mr. Hyder Ali Pirzada tor the Department at considerable length. Mr. Ali Athar has mainly contended that the raw material for the cloth manufactured is cotton and not yarn. He has argued that process of spinning yarn from ginned cotton to the weaving of cloth in the manufacture of cloth is continuous and cannot be disintegrated and, therefore, cotton continues to remain raw material and it can be said to have been utilised for the manufacture of the exported cloth and as such cotton alone could be charged to sales tax and not yarn as raw material for production of the exported cloth. Mr. Ali Athar appears to have lost sight of the fact that yarn itself is liable to tax and it is utilised in manufacture of cloth and also in other manufactured goods.
5. Section 2(12) of the Sales Tax Act defines "partly manufactured goods" to mean only goods which are to be incorporated into and form a constituent or component part of an article which is subject to tax. Section 2(12) of the Sales Tax Act reads as under:- "The goods which are not finished or are component parts of another article may be called partly manufactured goods. The tax will not be chargeable if the partly manufactured goods are sold by a licensed manufacturer to another licensed manufacturer or by a licensed whole-seller to another licensed whole seller or if those are imported by a licensed manufacturer."
Under Section 4 of the Sales Tax Act certain sales of goods are exempted from payment of tax.
Section 7 empowers the Central Government to exempt any goods or class of goods or any person or class of persons from payment of tax under this Act by a Notification published in the official Gazette. As regards the yarn sold outside Pakistan the Notification was published in the official Gazette on 1-5-1953. The effect of the Notification, read with Section 7 of the Act is to exempt cotton yarn sold outside Pakistan from sales tax. The definition of "partly manufactured goods" makes it clear that only those goods are to be included in it which are incorporated into and form constituent of component part of article which itself is subject to sales tax. Any cotton yarn, sold outside Pakistan, by reason of provision of Section 7 of the Sales Tax Act and the Government Notification quoted above cannot come under the expression "article which is subject to sales tax", and, therefore, yarn used in the manufacture of cloth cannot be treated as "partly manufactured goods" within the meaning of Section 4(a) of the Sales Tax Act. Accordingly, ginned cotton used in the manufacture of the exported yarn is not a "partly manufactured goods", and therefore, is subject to sales tax. Section 3(6)(d) of the Sales Tax Act provides that the keeping of goods by the manufacture for his own use would be regarded as a sale. That means they will be liable to the levy of sales tax. Mr. Ali Athar in support of his contention has relied on 1975 PTD 75, (1974) 29 Taxation 103, (1974) 29 Taxation 44, (1971) 23 Taxation 203, (1965) 11 Taxation 184 and 1980 PTD 17. The last two decisions, one of the Supreme Court of Pakistan and the other of the Division Bench of this Court do not support the argument of Mr. Ali Athar the learned counsel for assessee. In the decision reported in (1965) 11 Taxation 184, it was held, that if cottonseed oil be subject to the payment of tax, it is admitted that manufacture of cottonseed which is to be used for extraction of cottonseed oil does not require payment of any tax. It means that in case of the finished goods are exempt from Sales Tax, the manufacture of unfinished goods which are used is the manufacture of finished goods are liable to sales tax. In the last decision which is of Division Bench of this Court, Noorul Arfin, J. (as he then was) observed as under:- "Section 2(12) read with Section 4(a) of the Sales Tax Act, read with the above Notification which was issued under Section 7 of the Act, effectively negative the assessee claim for refund of sales tax on such ginned cotton as was used in the manufacture of yarn sold outside Pakistan, no exception can, therefore, be taken to the order of the Sales Tax Officer and that of the Tribunal upholding his order."
6. We are, therefore, of the view that the ginned cotton used in manufacture of yarn exported, and yarn used in manufacture of cloth exported, are not exempted from sales tax.
7. In view of what we have said above, the answers to the above questions in the above references are in the affirmative.