Agha Kafeel Barik Member Technical: This appeal has been filed by the amendment challenging the Order-in- appeal No. 103/2017 dated 09.08.2017 passed by the Commissioner (Appeals) in Appeal No. No.243/2016 confirming order-in-Original No.336/2016 dated 12.07.2016 passed by the Assistant commissioner (Mr. Nasir Bachani), SRB, Hyderabad.
1. This is a case of a private limited company based in Lahore doing process ing / manufacturing of LPG in Jamshoro (Sindh) for Sui Southern Gas Company Limited ISSGC).
2. The facts of the case, as borne from the record, are as under: 2.1. The appellant has signed a contract with GC under which it separates LPG from Sui gas being supplied by SSGC through its pipe lines and after filling the liquid compressed gas in tanke rs returns it back to SSGC for sale/supply at its end. The appellant charges processing fee on it from SSGC.
2.2. The appellant claims that this process is manufacturing and is subject to Federal Sales Tax and that it has been paying Sales Tax under Sales Tax Act, 1990 to the FBR, regularly .
2.3. After promulgation of SST Act,. 2011 the SRB/ Province of Sindh got jurisdiction over 'services' through 18" amendment in the Constitution. Hence the officer concerned, the AC-SRB Sindh, confronted the appellant through various notices anal finally a show-cause notice dated 14.10.2015 was issued to submit various information and to show cause as to why Sindh Sales Tax due on its services may not be assessed and recovered.
2.4. However , according to the AC-SRB Hyderabad the appellant refused to submit any information / documents requisitioned under Section 52 and 27 and none appeared on the last hearing. Hence the AC-SRB after confronting the appellant with a show cause notice dated 14.10.2015, passed order under section 23, 43 and 44 imposing Sindh Sales tax of Rs.61 million, plus penalty on the tax not paid. The figures of tax liability were picked up by the AC concerned from a letter of appellant's AR Mr. Naseem Zafar Associates dated 10.09.2014 addressed to Commissioner Inland Revenue, Lahore seeking some advice on the taxability of the services. The relevant part of the letter which has been used by the AC-SRB as an admission of tax liability of Rs.61 million to the SRB and also reproduced by Commissioner (Appeals) in his order at page 2 & 3 is as under: Now the company has entered into an agreement with the SSGC for the processing of gas.
In view of the above situation, the above taxpayer company has now split up its sales tax liability into the following two groups:- i. Liability pertaining to sale of LPG. ii. Liability on processing of LPG on behalf of SSGC.
"Liability of Sales Tax vide Sr. No.1 come to Rs.9,945,804/- which has been deposited with the FBR. Sales Tax return has also been filed for the above period, per copy attached.
"Whereas, liability of sales tax pertaining to Sr. No .2 is amounting to about Rs.61 million which is liable to be deposited with the Sindh Revenue Board because the said processing is taxable vide tariff heading No.9830.0000 of Second Schedule of the Sindh Sales Tax on Services Act, 201 1". (Emphasis provided)
2.5. The AC-SRB has passed order under section 23 holding that the services of the appellant are liable to SST under tariff heading 9830.0000 (service provided in the matter of manufacturing or processing for others on toll basis) which is ef fective from 1 1.07.2013.
3. In its appeal the appellant has raised various issues have including alleged defective show cause notice, and the jurisdiction of SRB over , what it claimed, manufacturing process etc.
4. The learned AR argued as under: 4.1. The show cause notice was defective as it did not contain the period of assessment nor it confronted the amount of default and its computation, while in the final assessment order under section 23 it has been charged at Rs.61 million.
4.2. Since the appellant involved in the manufacturing of LPG and residual gas supplied back to SSGC it is subject to sales tax under Sales Tax Act 1990 payable to FBR. He claimed that in fact the company has been regularly paying sales tax on the manufacturing services. He cited decisions of various courts including Supreme Court of Pakistan in Sheikhu Sugar Mills Limited, reported as PTCL 2001 CL331 in his support.
4.3. Notwithstanding the above, the jurisdiction of SRB vide SST Act, 2011 could not be exercised prior to 11.07.2013 on which date service of toll manufacturing under code 9830.0000 was entered through Finance Act, 2013. Apparently , the AC concerned has taken all receipts from July, 2011 till date of issuance of show cause- notice dated 14.10.2015.
The process is covered under the definition of 'manufacturer' under Section 2(17) of Sales Tax Act 1990 and that it also covered the case where the raw material of which goods are produced or manufactured are not owned by the manufacturer , as in the present case.
Accordingly he submitted that payment of Sales Tax to FBR was quite legal and that his action of not paying Sindh Sales Tax to SRB was quite justified. He cited various judgments for and against his arguments including; i) (2017) 1 16 Tax 13 (S.C.Pak) in the case of FBR Vs Al-Technique Corporation It is however , noted that in this case the process of sterilization of syringe Is discussed with reference to manufacturing whereas in the present case of the appellant the manufacturing is the subject matter with different connotation which is toll manufacturing and which is taxable under SST Act, 2011. In the cited judgment of the Honorable Supreme Court the issue was not the manufacturing for others or toll manufacturing. Although the respondent in that case was also manufacturer for the other party but this issue was never discussed in this case. ii) 2006 PTD 1459 Sindh High Court M/s AMIE Investment (Pvt.) Ltd. vs. Additional Collector-II.
This case also pertains to Sales Tax Act, 1990 and the issue was whether Federal Sales Tax should be payable on the value of supplies or the processing or conversion charges. The Honorable High Court held that no Sales Tax was payable by the appellant either on the value of goods returned to its principal or on the charges received from the conversion. The basic wisdom behind this judgment is that there was never any Federal Sales Tax under Sales Tax Act 1990 on services and it streng thens the instance of the respondent department SRB that after the promulgation of SST Act, 2011 the Province of Sindh / SRB got jurisdiction over taxation of services. Since toll manufacturing was added in the 2 Schedule under Tariff 9830.0000 w.e.f.1 1.07.2013 there remains no Iota of doubt about its jurisdiction. iii) Finally the judgment of this Tribunal in the case of M/s International Steel Limited in Appeal No.A T-08/2017 dated 13.04.2017 in which the Tribunal has held that "the Sindh Sales Tax on Services of toll manu facturing was rightly levied and the appellant is liable to pay Sindh Sales Tax on Services of toll manufacturing as assessed by the assessing of ficer.
5. On the other hand, the learned AC-SRB Hyderabad submitted that since the appellant totally refused to cooperate and submit any information/ documents on the pretax that SRB has no jurisdiction, the AC had to rely only on the available material, including a letter of the AR of the appellant dated 10.09.2014 addressed to the Commissioner Inland Revenue, Lahore in which he admitted that SST liability of the appellant towards SRB was Rs.61 million. However , he admitted that there was no proper calculation of tax nor the specific period was identified for which tax was imposed. At this stage the learned AR submitted that the appellant had already deposited a big amount of Sales tax with FBR on manufacturing under Sales Tax Act, 1990, but admittedly no Sindh Sales tax was paid to the SRB.
6. The learned AC-SRB also submitted that show-cause notice was issued on 14.10.2015 after issuance of notices under section 52 and 27 calling various information. In this show cause notice dated 14.10.2015 the appellant was also confronted as to why he should not be assessed under Section 23. The figures of tax were not confronted as same were not properly calculated because of the non-cooperative attitude of the appellant to submit any information / documents.
7. After hearing both the sides our findings are as under: 7.1. The show-cause notice dated 14.10.2015 may be vague but is not illegal as it has clearly specified code 9830.0000. The vagueness in the show cause notice is certainly caused because of the lack of cooperation by the appellant to submit relevant information / documents. Even if it had an instance that it is not taxable under S.S.T Act, 2011, he should have submitted information under section 27 and 52 as required by the AC concerned for the proper appreciation of the facts, including the period and year wise value of service, even if claimed not to be taxable by the appellant.
7.2. It was due to the reasons as discussed in the preceding paragraph that the AC assessed SST of Rs.61 million him on lump sum basis. Still it was not the brain child of the officer concerned but taken from the letter of the former AR of the appellant.
7.3. As far as the legal issue about the jurisdiction on toll basis of SRB is concerned on taxing services of processing toll basis, it is admitted by the AR that the contract manufacturing -- Also termed toll processing".
From the above definition, it is clear that finishing the goods for others against consideration is toll manufacturing and the same is a service falling tariff heading 9830.0000. The appellant in the arguments itself admits that it received grey cloths and finished it by using the material owned by it and after finishing returned the goods to owners. The reported case of Arnie Investment supra is fully applicable in this case. The reported case of Habib Jute Mills supra is not applicable to this case. Both the two forums below have rightly levied tax on the services provided or rendered by the appellant."
7.6. In the order dated 13 .04.2017 in International Steels Limited the Tribunal has held as under: "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 o 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 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 appellant 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 asnd "Manufacturer" and paying tax to FBR and furnished tax returns with FBR. The question is whether manufacturing of goods on the basis of material provided/ 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 -ll 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 same 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 some is a service falling under tariff heading 9830.0000 and is chargeable to tax.
"14.While making 18th amendment in the Constitution Article 270 AA was amended and clause (7) was inserted which rend 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 provisions 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 1st July, 2011. The effect of 18th amendment in the Bred by Constitution and Article 270 AA was also considered by the High Court of Sindh in the reported case Pakistan In 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 18th amendment to the Constitution (which took effect from 19.10.2010) the Provinces alone have 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 01.07.201 1 onwards, the date on which the Sindh Sales Tax on Services Act, 2011 come 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 some judgment supra in pars 73.d. it was also held that "d.
Subject to sub-para (e) below , the Sindh Sales Tax on Services Act, 2011 is validity enacted and intro vires the Constitution".
"15. Before 18th 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 Tax Act 1990 provides that there shall be charged, levied and paid a tax known as soles 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 known as sales tax of the value of taxable supplied made in Pakistan and goods imported in to Pakistan. Sub-sectio n (41) of Section 2 of the Sales Tax Act, 1990 provides that "taxable supply means a supply of taxable goods mode in Pakistan by on importer , manufacturer , wholesales including deale r), distributor or retailer". The word supply is defined under sub-section
(33) of section 2 of the Sales Tax Act, 1990, which Sea provides that "supply includes sales, 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 consideratio n, but the question needs to be exam' d s 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 goods" has held that "it is used only as an expression of transfer inter vivos or by operation of law and for such purpos e 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". 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 1e 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. T axes on the soles and purchase of goods imported exported, produces, 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, produces, manufactures 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 servic es 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 differe nt 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 mode 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 above 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.
8. Thus following the above two judgments of the D.B. of this Tribunal we hold that in the present case the AC-SRB rightly exercised its jurisdiction under SST Act, 2011 and assessed the service rendered by the appellant company to SSGC under tariff heading 9830.0000 . The impugned order of Commissioner (Appeals) is legal and is u el on this issue.
9. However , as discussed above, due to non-availability of data of year- wise value of service it was not possible for the AC-SRB to workout correct sales tax liability and, based on a previous letter of the AR of the appellant company , the AC charged lump sum tax of Rs.61 million.
10. Besides, it is also appears that the officer concerned has taken tax paid right from 01.07.201 1 till date of issue of show cause notice which was 14.10.2015. The learned Commissioner (Appeals) has also highlighted this issue in para 23 page 21 of his order in appeal. Apparently , it would not be proper to charge tax from July, 2011 in view of the fact that the said service of toll manufacturing under Code 9830.0000 has been entered in 2"d Schedule through Finance Act, 2013 w .e.f.1 1.07.2013. As such it would not be taxable prior to this date.
11. We, accordingly hold that the activity of the appellant separating LPG from sui gas being supplied by SSGC to appellant through its pipe lines and after filling the liquid compressed gas in tankers returns it back to SSGC for sale/supply at its end is covered by the definition of manufacturing or processing for others on toll basis as provided under Rule 42 H of the Sindh Sales Tax on Services Rules, 2011 and is liable to be taxed under the provisions of the Sindh Sales Tax on Services Act, 201 1.
11. In view of the above discussion both order in appeal and order in original are set aside and the case is remanded to the Assistant Commissioner SRB, Hyderabad for denovo assessment. The appellant is directed to provide year was wise break-up of service charges/fee received from SSGC for the period from 01.07.201 1 to 10.07.2013 and from 11.07.2013 to 30.06 .2015 to the officer Concerned within 60 days from the date of this order .
The AC-SRB Hyderabad, having jurisdiction over the case should work out value of taxable services for the period after 11.07.2013 (effective date) till 30.06.2015, on year wise basis and spell out clearly in his revised/modified assessment order the SST liability on year wise basis.
12. Consequentially the penalty order under section 43 (3) (a) is also set aside as no more effective without an assessment order in the field.
13. The impugned assessment order is thus remanded to the assessing officer as indicated above and the appeal is disposed of. The copy of the order may be supplied to the learned representative of the parties.
(Justice Nadeem Azhar Siddiqi) (Agha kafeel Barik)
CHAIRMAN TECNICAL MEMBER Karachi Dated: 20.09.2017 Copies supplied for compliance:- 1) The Appellant through authorized Representativelm0P 2) The Assistant Commissioner (Unit-), SRB, Karachi.
Copy for information to:- 3) The Commissioner (Appeals), SRB, Karachi.
4) Of fice Copy .
5) Guard File.