SHAHID MASOOD MANZAR, (JUDICIAL MEMBER).---The titled appeal has been preferred at the instance of the appellant against the impugned appellate order passed by Commissioner Inland Revenue (Appeals-I), Islamabad under section 45-B of the Sales Tax Act, 1990 (referred to as 'Act') vide Sales Tax Order-in-Appeal No. 47 of 2016 dated 10-03-2016 (hereinafter referred to as "Order- in-Appeal). The said order was passed in consequence of the appeal preferred by the registered person against the Order-in-Original No. 01 / 101 of 2015 passed by the Deputy Commissioner Inland Revenue, Audit-1, Large Taxpayers Unit, Islamabad (referred to as 'DCIR').
2. Facts for the purpose of disposal of this appeal, in brief, are that the registered person is a public limited company engaged in the business of airline and is subject to Federal Excise Duty. The registered person filed the monthly sales tax returns for the tax periods of 01/2015 to 03/2015 which were examined by the learned DCIR during desk audit. It was observed that the appellant has adjusted inadmissible input tax credits amounting to Rs. 9,776,620 on the invoices of food, beverages and services during the aforementioned tax periods. A show-cause notice dated 02- 09-2015 was issued whereby the registered person was required to explain its position which cropped up during the desk audit. The learned DCIR, not feeling satisfied with the reply submitted by the taxpayer proceeded to pass the Order-in-Original under section 11(2) along with default surcharge under section 34 and penalty under section 33 of the Act and raised sales tax demand of Rs. 9,776,620 against the company. The said order was contested by the registered person in appeal before the first appellate authority which has remanded the matter for de novo consideration. The company feeling dissatisfied with the Order of first appellate authority come up in further appeal before us.
3. The appellant has contested the appeal on the following grounds:--
(i) That the Order-in-Appeal No.47 of 2016, passed by Commissioner Inland Revenue (Appeal-I), [hereinafter referred as (CIR (A)], Large Taxpayers Unit, Islamabad is bad in law and opposite to the facts and circumstances of the case;
(ii) That the learned CIR(A) was not justified in remanding back the case after recording the reasons in favour of taxpayer which requiring the quashment or annulment of the proceedings;
(iii) That the learned CIR(A) has erred in remanding where DCIR has reject the claim of input tax because the input tax on above purchases are the direct ingredients of input tax which is used in the tendering of services and is admissible in terms of section 7 of the Sales Tax Act, 1990 read with S.R.O. 550(1)/2006 dated 05-06-2006;
(iv) That the CIR(A) was not justified in remanding where DCIR has wrongly imposed tax because Entry Nos. 2 and 3 of the S.R.O. 550(1)/2006 dated 05-06-2006 is relating to airline industry. The SRO supra is issued under section 7 of Sales Tax Act, 1990 which unequivocally allows the admissibility of input tax against the output tax arising out of local domestic travel;
(v) That the input incurred is in furtherance of business and sales tax output tax was generated which cannot be disallowed in terms of sections 7 and 8 of Sales Tax Act, 1990;
(vi) That registered person has not claimed input tax on international flights with regard to beverages and other eatable items in view of inadmissibility of input tax. In terms of section 4 of the Sales Tax Act, 1990, these are zero rated under section 4(b) of Sales Tax Act, 1990;
(vii) That the registered person was within in rights vest under the provisions of sales tax for the entitlement to deduct input tax paid against the taxable supplies (rendering of services) made to the passenger travelling within territory of Pakistan;
(viii) That appellant craves to amend, withdraw, add and substitute any grounds of appeal before or at the time of hearing of appeal.
4. The learned AR of the appellant contented that the Federal Excise Duty is levied and collected under section 3 read with Entry No. 3 of Table - II of the First Schedule to the Federal Excise Act, 2005. These services include travel by air by passengers within the territorial jurisdiction in Pakistan as well as travel by air of passengers embarking on international journey from Pakistan. Such services enjoy constitutional backing under Entry No. 53 of Fourth Schedule to the Constitution of Pakistan, 1973 which deals with the "...Terminal taxes on goods or passengers carried by.... air; taxes on their fares and freights". He explained that travel by air of passengers within the territorial jurisdiction of Pakistan is classified under PCT heading 9803.1000 under category (a) to Entry No. 3 of the Table - II to the First Schedule to Federal Excise Act, 2005 and FED is levied and collected as if it were a tax payable under section 3 of the Sales Tax Act, 1990 vide Notification No. S.R.O.
550(1)/2006 dated 05-06-2006. In this notification. the Federal Government has exercised powers conferred by section 7 of the Federal Excise Act, 2005.
5. The learned AR vehemently contested that as the PCT heading 9803.1000 is covered under SRO.
550(1)/2006 dated 05-06-2006 wherein Federal Excise Duty is transformed into sales tax and be collected under section 3 of the Act, all the provision of the Act, rules made, notifications, orders and instructions issued shall apply. He submitted that food, beverages and other services used in the furtherance of the taxable activity and are integral part of the travel services (which is taxable activity under section 2(35) of the Act) cannot declared inadmissible with any stretch of imagination with reference to input claimed on drinks and eatables, foods served during the flight is concerned. So far as the input tax on services are concerned he submitted that these are incurred in the furtherance of business and has direct nexus to the services rendered in the course of taxable activity. The services include the stay of the designated crew at the designated stop over hotels during the flight operations. He, further, drew our attention that airlines are under obligation to follow international conventions and regulations issued by the Civil Aviation Authority to take care the flight and cabin crew and to ensure that each member of the crew should be fatigue free. The airline has made such arrangements with different hotels in different cities for the crew to take rest for fresh embarkation of onward duties. Such arrangements have direct nexus with performance of duties and such connection is in the furtherance of business as well as taxable activity. Therefore, such an activity is direct ingredient of input tax.
He also drawn our attention that the input tax used in international journey from Pakistan is concerned, FED is collected and deposited in national exchequer. So far as the items like food, supply of stores and provisions are concerned, these are specifically zero-rated in terms of section 4(b) of the Act, therefore, it is very clear that these input tax credits are directly relating to services against which the output tax (under sales tax mode) has been paid by the appellant. He also produced a letter C. No. 2(6) Audit-II/Tax.Inform/ST&CE-W/2002 dated 25-01-2002 issued by Additional Collector of the erstwhile Collectorate of Sales Tax and Central Excise (West), Karachi to Pakistan International Airline Limited which states that " Supply of stores and provision for consumption abroad a conveyance proceeding to destination outside Pakistan can be made zero rated in terms of clause (b) of Section 4 of the Sales Tax Act, 1990 provided they are distinguished from the goods consumed on domestic flights by the Airline." Since the entire supply of stores and conveyance for consumption abroad enjoys zero-rating, therefore, any element of inclusion of input tax incurred on travel of passengers on international journey is out of question.
6. The learned AR contended that Notification SRO No. 490(1)/ 2004 dated 12-06-2004 states that "... ..... the Federal Government is pleased to specify the following goods, acquired otherwise than as stock in trade by registered person, to be the goods in respect of which.input tax shall not be claimed, namely... . .... ". This SRO squarely allows input admissibility as far as it is stock in trade and is used in taxable activity. He submitted that a similar issue was raised before the Hon'able Supreme Court of Pakistan while interpreting S.R.O. 1111(I)/90 dated 01-11-1990 (one of the predecessor notification to S.R.O. 490(1)/2004 dated 12-06-2004) in the case reported as 2005 PTD 779 and Hon'able Apex Court held that stock in trade has to be given dictionary meaning.
7. The learned AR has placed reliance on the judgments reported as 2001 PTD 2097 (S.C. Pak) and 2014 PTD 1285 (H.C. Lah.) to support the contention of admissibility of input tax under section 7 of the Act.
8. The learned DR, in his turn, reiterated the contention of the DCIR and the learned first appellate authority and supported the orders of the authorities below.
9. We have carefully examined the available assessment records and considered the submissions of the learned AR and DR both. The main issue involved in this appeal is whether the appellant is liable to adjust input tax on food, beverages and other services in terms of section 7 of the Sales Tax Act, 1990 or it would hit by S.R.O. 490(1)/ B 2004 dated 12-06-2004. We are of the opinion that under the sales tax law, the appellant is entitled for the adjustments of input tax in terms of section 7 read with S.R.O. 550(1)/2006 dated 05-06-2006 on food, beverages and other services. The appellant is engaged in the services of air travel of passengers within territorial jurisdiction which are subject to Federal Excise Duty but its collection is under Sales Tax Mode. The preamble of S.R.O.
550(1)/2006 dated 05-06-2006 is very clear and unambiguous which read as under:-- "...In exercise of the powers conferred by section 7 of the Federal Excise Act, 2005, and in supersession of its Notification No. S.R.O 648(1)/2005 dated 1st July, 2005, the Federal Government is pleased to specify the services mentioned in the Table below on which excise duty shall be levied and collected as if it were a tax payable under section 3 of the Sales Tax Act, 1990, and all the provisions of the said Act and the rules made and notifications, orders and instructions issued thereunder shall, so far as may be with necessary modifications, apply....,"
The above noted preamble hardly leave any iota of doubt about the provisions of Act on the application services rendered in respect of travel by air of passengers within the territorial jurisdiction of Pakistan. The collection of FED on services rendered by air within territorial jurisdiction if Pakistan is deemed as the output tax payable on supplies (supply of services) under Sales Tax Act, 1990. The passengers (buyer of services) are offered free meal/eatables and drinks etc., during the flight which is integral part of travel service to passenger and it is not charged separately for such service. The flight crew/staff between the period of retiring from one flight to next flight is entitled to stay in designated hotels arranged by the airline. Any input tax incurred with reference to crew is directly attributable to the taxable activity of the airline. Thus, any sales tax paid/incurred on the crew/staff of the airline and the input tax paid on the refreshment of passengers is having direct attribution on the furtherance of taxable activity. Any input tax paid on above activity is admissible in term of section 7 of the Sales Tax Act, 1990 which clearly allow input tax adjustment for the purpose of determination of tax liability during the impugned tax periods. Since the input tax attributed is having direct. nexus with the taxable activity, the S.R.O. 490(1)/2004 cannot be invoked.
In reaching above conclusion, we are fortified with the judgments of the Supreme Court reported as 2001 PTD 2097 and Lahore High Court reported as 2014 PTD 1285. We, therefore, agree with the submissions and reasoning of learned AR of appellant that the input tax suffered in rendering of services is admissible. We have observed that the learned DCIR has failed to pointed out a single instance of misuse or personal usage on part of management in respect of input tax incurred.
10. It is also not out of context to mention here that even S.R.O. 490(1)/2004 dated 12-06-2004 provide exception to the items on which the input tax is not admissible. This exception is "goods" otherwise than 'stock in trade'. It is the version of the learned AR that in accounting all the purchases of stores and provisions are classified as "stock-in-trade" and attribution or usage in the taxable activity allows entitlement beyond any show of doubt. This is what sections 7 and 8 mentioned as "entitled".
11. Moreover, we would also like to clarify that the controversy of the interpretation of term 'stock-in- trade' is settled by the Hon'ble Supreme Court of Pakistan in the case of Attock Cement Pakistan Limited v. Collector of Customs and Central Excise reported at 2005 PTD 779 as under;-- "The next important question is what is meant by "stock-in-trade", the term which was used in notification, dated 10-7-1993 issued in suppression of the notification, dated 1-11-1990. The learned counsel for the appellant drew our attention to the dictionary meaning of stock-in-trade: Black's Law Dictionary: "The inventory carried by a retail business for sale in the ordinary course of business. Also, the tools and equipment owned and used by a tradesman."
The Shorter Oxford English Dictionary: "The goods kept on sale by a dealer, shopkeeper, pedlar. Also, a workman's tools, appliances, or apparatus."
Chambers English Dictionary: "All the goods a shopkeeper has for sale: standard equipment or devices necessary for a particular trade or profession: a person's basic intellectual and emotional resources (often implying inadequately or triteness."
The Concise Oxford Dictionary of Current English: "1. All the requisites of a trade or profession.
2. A ready supply of characteristic phrases, attitudes, etc."
Webster's Third New International Dictionary: "1. The equipment necessary to or used in the conduct of a trade or business: as a: the goods kept for sale by a shopkeeper B: the fittings and appliances of a workman C: the aggregate of things necessary to carry on a business 2. Something held to resemble the standard equipment of a tradesman or business."
In the absence of the technical definition of "stock-in-trade" by the Legislature in the Act or the Rules framed thereunder, one has to resort to the dictionary meanings and in view of the dictionary meaning referred to above...."
From the above dictum of the Hon'ble Supreme Court of Pakistan, it is clear that ordinary meaning should be assigned to stock-intrade. In our opinion, the purchases made by the airline for servicing the passengers during the flight squarely fall, both, under the legal definition as well as accounting definition do not bar the admissibility on the input tax so incurred. So far the input tax on services are concerned, section 2(14) clearly embed with sales tax on services, therefore, same is also admissible. The upshot of the whole discussion is that the input tax paid on the goods and services is admissible as used within flights and allied flight operation within the territorial jurisdiction of Pakistan because its use is in the taxable activity and furtherance of business. For the reasons stated above we allow this appeal and orders passed by authorities below are, hereby, set-aside.
13. Resultantly, the appeal succeeds.