Justice Nadeem Azhar Siddiqi : This appeal has been filed by the appellant challenging the Order-in-appeal No. 220/2016 dated 26.12.2016 passed by the Commissioner (Appeals) in Appeal No. 260/2016 confirming Order-in-Original No. 756/2016 dated 15.08.2016 passed by the Assistant Commissioner (Ms. Anbreen Fatima), SRB, Karachi.
1. In short, the facts of the case as stated in Order-in-Original are that the appellant are engaged in providing or rendering services in respect of manufacturing or processing for others on toll basis falling under tariff heading 9830.0000 of the Second Schedule of the Sindh Sales Tax on Services Act, 2011 (hereinafter referred to as the Act) at the rate of 16% w.e.f.
01.07.2013.
2. The allegations against the appellant in the order-in-original are that from the audited accounts it is evident that for the year ended June-2014 and June 2015 the appellant was engaged in toll manufacturing services. The appellant mentioned that the revenue earned from such services in Note 20 of the Notes to Accounts section and have realized revenue of Rs.135,960,000/= during the period ended June-2015 and Rs.10,960,000/= during the period ended 30 June-2014. It was further alleged in the order-in-original that the total sum of Rs.146,920,000/= of revenue earned under the tall manufacturing during two years period involve the Sindh Sales Tax of Rs.22,147,600/= (Rs.20,394,000/= being 15% of Rs.135,960/= and Rs.1,753,600/= being 16% of Rs.10,960,000/=).
3. It was stated that the appellant was advised vide letter dated 30May, 2016 to get itself registered with SRB and deposit due amount of Rs.22,147,600/=and furnish correct sales tax returns, but the appellant failed to comply with the statutory provisions of law.
4. The appellant was served with a Show Cause Notice Dated 14.06.2016 as to why the appellant should not be compulsorily registered. The appellant was also 'required to explain as to why the Sindh sales tax on services provided in respect of toll manufacturing amounting to Rs.22,147,600/= may not be assessed and recovered along with default surcharge and penalties.th th
5. The appellant filed written reply on 11.08.2016. In the reply it was stated that the appellant is manufacturer of steel and a small quantity of toll manufacturing was done for some customers and the sales tax on toll manufacturing sales has already been paid to FBR @ 17%.
6. The Assessing Officer passed-order-in-original for payment of sales tax of Rs.22,147,600/= along with default surcharge (to be calculated at the time of payment). The Assessing Officer imposed penalty of Rs.1,107,380/= under section 43(1) of the Act. The Assessing Officer also imposed penalty of Rs.8,485,990/= under serial No.1, 2 and 3 of Table of Section 43 of the Act.
7. The Respondent challenged the Order-in-Original by way of filing of Appeal No.260/2016 before the Commissioner (Appeals) who dismissed the Appeal, upholding the Order-in-Original and that order- in-appeal is being challenged before this forum.
8. Mr. Bilal Mahpara the learned Representative of the appellant states that the appellant are manufacturer of steel products for self and for others on providing material and is registered with FOR and regularly paying tax to F FBR. He then submits that the appellant is covered by the definition of manufacturer as per sub-section (17) of section 2 of Sales Tax Act 1990. He then referred to Article 143 of the Constitution of 1973 and submits that since there is inconsistency between the provisions of Sindh Sales Tax on Services Act, 2011 and Sales Tax Act, 1990 the provisions of Act of 1990 will prevail. He also referred to Entry No. 49 of the Fourth Schedule of the Constitution of 1973 and submits that the levy of tax on manufacturing is in the exclusive domain of Federal Government. He then submits that the Province of Sindh has no powers to tax manufacturing process. Mr. Bilal referred to the following reported cases in support of his contention).
(i) Sheikhoo Sugar Mills and others V ersus Government of Pakistan, PTCL 2001 CL 331.
(ii) Solv-Tech (Pvt) Limited 2010 PTO 1269.
(ill) Collector of Customs versus Mahboob Industries, 2006 PTD 730. (iv) Colony Textile Mills Limited versus CST, Lahore, 1980 PTD 201.
9. Mr. Rashid Ahmad the learned AC for respondent states that toll manufacturing is covered by tariff heading 9830.0000 of the Second Schedule of the Act. He then submits that the financial statement shown that the appellant is providing and rendering services of toll and manufacturing and also admits the same in its written defence. He then submits that the definition of toll manufacturing is not available in the Act and referred to Rule 42 (H) of the Sindh Sales Tax on Services Rules, 2011 and submits that the procedure for collecting tax on the services of toll manufacturing was provided. He then submits that manufacturing for others is toll manufacturing and is a service chargeable to Sindh sales tax. Ile then submits that Sales Tax 1990 is not applicable as the same deals with sales of goods and not services.
He then submits that if the appellant is working for others it is not a manufacturer but a toll manufacturer and is liable to pay Sindh sales tax. Mr. Rashid All relied upon the following reported cases in support of his contention.
(i) M/s Amie Investment versus Additional Collector and others, 2006 PTD 1459
(ii) Unreported order of this Tribunal in the case of Al-Abid Silk Mills.
10. Mr. Bilal in rebuttal submits that the facts of the reported case of M/s Arnie Investment are distinguishable and is not applicable to the facts of this case. He then submits that since the toll manufacturing is covered by the definition of "manufacturer or producer" provided in the Sales Tax Act, 1990 the application of dictionary meaning is not proper .
11. We have heard the learned representative of the parties and perused the record made available before us.
12. The appellant claims that he is a manufacturer and registered with FBR and his activities are covered under sub-section (17) of section 2 of Sales Tax Act 1990 and is paying tax. Before proceeding further it has to be seen whether the manufacturing of goods for others is a sale or service. It is an admitted position that the appellant manufactured goods for its principal on providing raw material and after manufacturing return the goods to the principal who supplied the raw material. This transaction between the appellant and its principal cannot be termed as sale of goods as for qualifying sale of goods the on disposition of goods is necessary and change ownership or title is also necessary which is lacking in this case. The transaction between the appellant and its principal is of providing or rendering service in relation to toll manufacturing.
13. This is not disputed that the appella nt manufacture goods for others. This fact is evident from the financial statements as well as from the written defence of the appellant. As per the appellant it is registered with FBR as "Manufacturer" and paying tax to FBR and furnished tax returns with FBR. The question is whether manufacturing of goods on the basis of material provide d/supplied by others comes with the definition of "manufacturing" or -"toll manufacturing". Rule 42 H of the Sindh Sales Tax on Services Rules, 2011 provides that the provisions of this rule shall apply to the persons (hereinafter called "toll manufacturer or processor) providing or rendering the services in the matter of manufacturing or processing for others on toll basis. Sub-rule (2) provides that every such toll manufacturer or processor who renders the services in the matter of manufacturing or processing for others on toll basis shall be liable to registration under section 24 of the Act, read with the rules prescribed under Chapter-II of the rules. Sub-rule (3) provides that the value of the taxable services for the levy of tax shall be the gross amount charged for the services provided or rendered. The words "Toll Manufacturing" has not been defined in the Act or the Rules made thereunder . The words "Toll Manufacturing" has been defined in the Black's Law Dictionary Tenth Edition that "toll manufacturing (1977) an arrangement under which a customer provides the materials for a manufacturing process and receives the finished goods from the manufacturer. The some party owns both the input and the output of the manufacturing process. This is a specialized form of contract manufacturing. -- Also termed toll processing". From the above definition it is clear that providing or rendering services in the matter of manufacturing or processing of the goods for others against consideration is toll manufacturing and the same is a service falling under tariff heading 9830.0000 and is chargeable to tax.
14. While making 18 amendment in the Constitution Article 270 AA was - amended and clause (7) was inserted which read as under: "(7) Notwithstanding anything contained in the Constitution, all taxes and fees levied under any law in force immediately before the commencement of the Constitution (Eighteenth Amendment) Act, 2010 shall continue to be levied until they are varied or abolished by an Act of the appropriate legislature". From this provision it appears that the levy of Sales Tax vide Sales Tax Act, 1990 was saved or protected till such time the same is varied or abolished by the appropriate legislature. The Province of Sindh has enacted the Sindh Sales Tax on Services Act, 2011 effective from 1' July, 2011.
The effect of 18 amendment in the Constitution and Article 270AA was also considered by the High Court of Sindh in the reported case of Pakistan International Freight and Forwarders Association versus Province of Sindh and others 2017 PTO 1 and in paragraph 73. c. it was held as under: "c. It is declared that on account of the 18 amendment to the Constitution (which took effect from 19.10.2010) the Provinces alone hove the legislative power to levy a tax on the rendering or providing of services, but this is subject to Article 270 AA (7) of the Constitution (as substituted by the said Amendment), and by reason thereof the legislative competence has manifested in the Province of Sindh from 01.07.2011 onwards, the date on which the Sindh Sales Tax on Services Act, 2011 came into force". From this it is clear and evident that the power to levy tax on services is within the domain of the Provinces. In the same judgment supra in para 73.d. it was also held that "d. Subject to sub-para (e) below, the Sindh Sales Tax on Services Act, 2011 is validly enacted and intro vires the Constitution".
Before 18 amendment in the Constitution Sales Tax, 1990 was enacted to levy tax on sale, importation, exportation, production, manufacture or consumption of goods. Section 3 of the Sales Act 1990 provides that there shall be charged, levied and paid a tax known as sales tax of the value of taxable supplies made in Pakistan and goods imported Into Pakistan. Sub-section (41) of section 2 of the Sales Tax Act, 1990 provides that "taxable supply means a supply of taxable goods made in Pakistan by an importer, manufacturer, wholesaler (including deafer), distributor or retailer". The word supply is defined under sub-section (33) of section 2 of the Sales Tax Act, 1990, which provides that "supply includes sale, lease (excluding financial or operating "lease or other disposition of goods in furtherance of business carried out for consideration". The word supply has been considered by the High Court of Sindh in the reported case of M/s Amie Investment (Pvt) ltd, versus Additional Collector and others, 2006 PTD 1459. The High Court has held that "there can be no denial of the fact that the business of the appellant is carried out for consideration, but the question needs to be examined is as to whether the returning of goods by the appellant after processing would amount to "disposition of goods". The High Court after considering the dictionary meaning of "disposition of goods" has held that 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 includedth t th th th in the expression "disposition of goods". It was further held in the same judgment that "the processing of goods by the appellant surely is a manufacturing process. However , 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".
16. After 18th amendment in the Constitution Entry No. 49 of the Fourth Schedule of the Constitution was amended. The Entry No.49 before amendment was read as under: "49. Taxes on the sales and purchase of goods imported exported, produced, manufactured or consumed".
Entry No. 49 of the Fourth Schedule of the Constitution after amendment read as under: "49. Taxes on the sales and purchase of goods imported exported, produced, manufactured or consumed. (Except sales tax on services)".
The High Court of Sindh in its latest judgment reported as Pakistan International Freight and Forwarders Association versus Province of Sindh and others 2017 PTD 1, in paragraph 58 considers the exception by framing a question "how does the "exception" apply and what is the effect? While replying the question Mr. Justice Munib Akhtar speaking for the Bench held that "In our view, the "exception" added to entry No. 49 is not a true exception. Rather, it is an independent provision in its own right It has to two primary effects. Firstly, and most Importantly for present purpose it recognizes expressly on the constitutional plane that a taxing power in respect of the taxing event of rendering or providing services vests In the provinces ....The real effect of the "exception" is to "shift" the taxing power in relation to the taxing event of rendering or providing of services from the Federation to the Provinces. In paragraph 59 of the judgment it was held that "59. The second effect of the "exception" though not directly relevant for present purpose, may also be adverted to. Entry 49 is concerned with; inter alia, the sale of goods.
The taxing power in relation thereto vests solely in the Federation. The taxing power in relation to the rendering or providing of services now vests solely in the Province". After this judgment the authority of the Province to tax the services cannot be questioned on the touch stone of Article 143 of the Constitution. Article 143 can be applied if there is inconsistency between a Federal and Provincial Law. The Sales Tax Act 1990 was enacted to levy tax on sale, importation, exportation, production, manufacture or consumption of goods, whereas the Sindh Sales Tax on Services Act, 2011 was enacted to levy tax on services provided, rendered, initiated, or consumed in the Province of Sindh. The subject matter of the two laws is different and distinguishable and both have their own field of application.
17. As per the appellant's own showing the Federation can tax the taxable supplies made in Pakistan and not on services provided on consideration to others. The sales tax on services is levied on the services provided or rendered within or from Sindh. In view of the discussion it is held that the Sindh sales tax on services of toll manufacturing was rightly levied and appellant is liable to pay Sindh Sales Tax on services of toll manufacturing as assessed by the Assessing Officer. Both the two forums below have rightly levied tax on the services provided or rendered by the appellant.
18. As far as the penalty is concerned the appellant is not liable to pay any penalty as there was a contest between the parties regarding the taxability of services rendered and provided by the appellant. The department has also failed to establish mens rea on the part of the appellant. As far as the default surcharge is concerned, we recommend that Sindh Revenue Board may kindly consider exempting at least seventy five present (50%) of the amount of default surcharge as special case by exercising the powers under section 45 of the Sindh Sales Tax on Services Act, 2011. It may point out that in implementation of the laws and rules, the purpose is not to create hardship but on the other side ensure proper and timely implementation of the laws and rules framed thereunder .
19. In view of the above, the order in original and order in appeal are modified to the extent as mentioned in para 18 of this order . The appeal is disposed of in the above terms.
(Agha Kafeel Barik) (Justice Nadeem Azhar Siddiqi)
TECHNICAL MEMBER Chairman Karachi, Dated: 13.04.2017 Copies supplied to:-
1. The Appellant through authorized Representative.
2. The Assistant Commissioner , SRB, Karachi.
Copy for information to:- 3) The Commissioner (Appeals), SRB, Karachi.
4) Of fice copy . 5) Guard file.