SHAHID MASOOD MANZAR, CHAIRMAN. The instant appeal has been filed against Order-in-Appeal No. 178 of 2020 dated 16-09-2020 passed by the learned CIR(A), Faisalabad whereby, he while maintaining the Order-in-Original No.01 of 2020 dated 13-01-2020, dismissed the appeal. The following grounds have been raised by the appellant:-
1. That the committee comprising of Officers of sales tax department and representatives of exporters of the confectionary items, constituted for fixation of percentage of use of packing material, towards exports of confectionary items was not legally authorized because all parties in the said committee were not empowered to signed and to execute stipulations, contents and substance of such agreement as it is the Federal Government who could restrict input tax credit in case of zero-rated supplies through an official notification and none else.
2. That sales tax functionaries are not empowered to restrict and fix input tax refund on exports as it is the Federal Government who may, by a notification in the official gazette, restrict amount of credit of input tax actually paid and claimed by a person making zero-rated supplies of goods otherwise chargeable to sales tax under the 2nd Proviso to Clause (sd) of section 4 of the Sales Tax Act, 1990. Since, no Notification regarding restriction of input tax on packing material meant for exports of confectionary items under the aforesaid proviso has ever been issued by the Federal Government, therefore, fixation of percentage of refund of input tax incurred thereon is not only unlawful and illegal but also unjustified and unfair hence nullity in the eye of law.
3. That refund of sales tax is being processed and sanctioned on the basis of input tax incurred on goods meant for exports contrarily; rejection of refund on packing material is being made on the basis of its purchases irrespective to its actual consumption towards exports.
4. That impugned agreement dated 12.04.2006 made between sales tax department and the Confectionary Association has never been converted into law by the Federal Government hence, the same is liable to be declared null and void as it is Federal Government who can restrict the amount of credit for input tax actually paid and claim by a person making zero-rated supplies and none else. In this regard, reliance is placed on landmark judgments of Hon'ble High Court, Lahore in cases of M/s. Mehmood and Company as reported as (2005 S. T. R 127), M/s. Tauair Ashraf & Co., Lahore as reported at (2007) 95 Tax 261) and Messrs Crescent Re-Rolling Mills, Lahore as reported at (2005 PTD 2436) = (GST 2005 CL 73).
5. That relying upon the judgments cited supra, Division Benches of the ATIR, Lahore in case of the same appellant, has not only declared the 'impugned agreement dated 12.04.2006' as illegal and ab initio void but also allowed refund of input tax rejected on the basis of this agreement reported as (2011 PTD (Trib.) 20) and (2012 PTD (Trib.) 31). Further reliance is also placed on the judgment of ATIR, Lahore chaired by Hon'ble Chairperson Mr. Justice (R) Khawaja Farooq Saeed sho also declared the impugned agreement as void and illegal and allowed refund of input tax in a case reported (2010 PTD (Trib.) 2126). The ratio decidendi in the said judgments is as under:- "Adjustment of input tax cannot be denied to the registered person on the basis of any agreement which was not reduced into statutory instrument and therefore, was not enforceable under the law".
6. That nevertheless in case, packing material exceeds 3.6% of the total amount of refund claimed even then the samples of goods exported were to be drawn at time of exports as provided under section 25(A) of the Sales Tax Act, 1990 but no such samples has ever be drawn by the sales tax department without which rejection of refund is not only against letter and spirit of the impugned agreement but also unjustified and unlawful. That furthermore, as per stipulations of the said agreement dated 12.04.2006, refund of sales tax on packing materials upto 3.6% was to be allowed in normal circumstances and in case, it exceeds that very threshold then the representative samples of exported consignments were to be drawn to prove its consumption of packing materials towards exports but no such samples were ever drawn and rejection of refund is being made arbitrarily.
7. That packing material is necessary for packing of confectionary items and there is no provision in the Sales Tax Act, 1990 or the Rules made thereunder which restrict the consumption of packing material. The consumption and use of packing material i.e. (Printed Boxes, Mini Boxes, Jar Plastic, Carton, Carton Tape, Printed Sticker, Jar Sticker/Label, Rigid P.V.C. Sheet, Aluminum Foil, Plastic Eggs and Papers and Printed Stickers Wrapped around Gums, Candies, Toffees and Sweets, etc) towards experts of confectionary items cannot be fixed as it depends on may factors inter alia including:- i. demand of confectionary items by the buyer in different shapes, sizes, quality of food stuff being exported by the appellant; ii. prices of raw and packing materials; iii. price of goods exported; iv. standards of packaging for keeping food stuff in hygienic conditions as per international requirements; v. requirements and standards of importing countries; vi. global competition and standards in food stuff, etc;
2. Succinctly stated, essential facts of the case are that the appellant is engaged in the business of manufacturing and export of confectionery items and during post audit of its refund files for the tax periods from February-2018 to April-2019, certain discrepancies were pointed out, on the basis of which, a show cause notice dated 06-01- 2020 for recovery of already refunded amount of sales tax worth Rs.3,933,376/- was issued. In this way, appellant was charged with violations of sections 3, 3(1A), 4, 6, 7, 8, 10, 11, 22, 23, 26 and 73 that as to why refunded amount of sales tax may not be recovered under section 11(2) of the Act along with default surcharge and penalty under sections 34(1), 33 and 33(19) ibid. During adjudication proceedings, appellant contested the issue supported with documentary evidences but the Inland Revenue Audit Officer has adjudged liability of sales tax worth Rs.1,844,431/- vide Order-in-Original No. 01/2020 dated 13-01-2020 along with default surcharge under section 34 and penalty under section 33 of the Act was also imposed. Being discontented and aggrieved by the said order, appellant filed the first appeal before learned CIR(A), Faisalabad who remanded back the issue of No.1 and dismissed the appeal against Issue No.2 involving sales tax of Rs.1,258,936/- vide Order-in-Appeal No.178/2020 dated 16-09-2020. Now, the appellant has filed the second appeal before this Tribunal on issue of disallowance of input tax against packing material.
3. Learned counsel appearing on behalf of appellant has contended that sales tax functionaries were not empowered to restrict and fix the amount of credit of input tax on exports as it is the Federal Government who may, by a notification in the official gazette, restrict amount of credit for input tax actually paid and claimed by a person making zero-rated supplies of goods otherwise chargeable to sales tax under the 2nd proviso to clause (c) of section 4 of the Sales Tax Act, 1990 therefore, rejection of refund due to fixation of percentage of packing material towards exports is illegal and unlawful. Learned AR assailed that impugned agreement dated 12-04-2006 made between Sales Tax Department and the Confectionary Association has never been converted into law by the Federal Government therefore; the same being illegal and unlawful may be declared nullity in the eye of law. Learned AR argued that the agreement relied upon by the learned CIR(A) was not of binding nature because it was not reduced into a statutory instrument. In order to strengthen the contentions, he has placed reliance on the judgments of Ho'ble High Court, Lahore reported as (GST 2005 73), (2005 PTD 72), (2007 PTD 47) and judgments of ATIR, Lahore reported as (2010 PTD (Trib.) 2126), 2011 PTD (Trib.) 20), (2012 PTD (Trib) 31). Learned counsel pointed out that in case, packing material exceeds 3.6% of the total amount of refund claimed even then the samples of goods exported were to be drawn at the time of exports as provided under section 25(A) of the Sales Tax Act, 1990 but no such samples has ever be drawn by the sales tax department without which rejection of refund is not only illegal but also unjustified. He has therefore, requested to vacate the impugned orders.
4. On the other hand, the learned DR in counter arguments, has opposed the contentions of learned counsel for the appellant and supported the order of the learned CIR by arguing that agreement executed between the Collector and Confectionery Association was binding upon the contracting parties and the claim of input refund being in excess of 3.6% limit had rightly been disallowed by the department. He has requested to uphold the impugned orders.
5. We have heard the learned representative appearing for the appellant as well as the respondent and also scanned the relevant material in the light of submissions and citations during the course of hearing. After going through the case record and relevant provisions of law, we are of the firm opinion that rejection of refund on the basis of an agreement made between sales tax department and the confectionary association which has never been converted into law by the Federal Government hence; the same is illegal and void. The agreement between sales tax department and the Confectioner's Association did not have binding force because it had not been enacted as a piece of legislation and did not have the force of law. The plea that a person did for some time accepted the terms of an agreement and acted upon the same does not convert that agreement into a law. The agreement between the parties having never been reduced in the form of a statutory instrument, any person affected by the same could very well refuse to abide by such agreement even after having initially accepted the same. It is settled law that any agreement between an association of taxpayers and the revenue department has no binding effect against the express provisions of law unless the same is supported by any superior or subordinate legislation. While confronted with hereinabove factual and legal position, learned DR could not controvert the same and candidly submitted that legal issue involved in the instant case is fully covered with the judgments of Hon'ble Lahore High Court in case of M/s. Mehmood and Company reported as (2005 PTD 72 H. C. Lah) and M/s. Tauqir Ashraf & Company, Lahore reported at (2007 PTD 47 H.C. Lah.) wherein it has been laid down; "The agreement between the said Association and the Revenue, as noted above, having never been converted into law through the process prescribed in that behalf, no person could be forced to comply with the same. The plea that a person did for some time accepted the term of an agreement and acted upon the same does not convert that agreement into a law.--There is no estopple against law. The agreement between the parties, if not reduced in the form of a statutory instrument, then any person affected by the same can very well refuse to abide by such agreement even after having initially accepted the same."
Further reliance is placed on the judgment of the Lahore High Court in the case of M/s. Crescent Re-rolling Mills reported as (GST 2005 CL 73 H.C. Lah) wherein the honourable Court held:- "There is no estoppel against law. The agreement between the parties having never been reduced in the form of a statutory instrument, any person affected by the same could very well refuse to abide by such agreement even after having initially accepted the same. An association of taxpayers is different from a collective bargaining agent which is authorized by law to negotiate and bargain on behalf of the labourers which it represents. An association of taxpayers has no role to play under the Sales Tax Act nor any of the rules framed thereunder."
Relying upon the judgments quoted supra, Division Benches of this Tribunal, Lahore in case of the same registered person and some other taxpayers has not only declared the impugned agreement as illegal and ab initio void but also allowed refund of input tax on packing material rejected on the basis of this agreement in judgments reported as (2010 PTD (Trib.) 2126), (2012 PTD (Trib.) 31), (2011 PTD (Trib.) 20). The ratio decidendi in the said judgments is as under:-- "Adjustment of input tax cannot be denied to the registered person on the basis of an agreement which was not reduced into statutory instrument and therefore was not enforceable under the law."
We have also observed that consumption of packing material is necessary for packing of confectionary items and there is no provision in the Sales Tax Act, 1990 or the Rules made thereunder which restrict the consumption of packing material and in case, packing material exceeds 3.6% of the total amount of refund claimed even then the samples of goods exported. were to be drawn at the time of exports as provided under section 25(A) of the Sales Tax Act, 1990 but no such samples has ever been drawn by the sales tax department without which rejection of refund is not only against letter and spirit of the impugned agreement but also unjustified and Unlawful.
In the instant case, sales tax functionaries were not empowered to restrict and fix input tax refund on exports as it was the Federal Government who may, by a notification in the official gazette, restrict amount of credit for input tax actually paid and claimed by a person making zero-rated supplies of goods otherwise chargeable to sales tax under the 2nd proviso to clause (c) of section 4 of the Sales Tax Act, 1990, Since, no notification regarding restriction of input tax on packing material meant for exports of confectionary items under the aforesaid proviso has ever been issued by the Federal Government therefore, fixation of percentage of refund of input tax incurred thereon is not only unlawful and illegal but also unjustified and unfair hence, nullity in the eye of law. For reference, 2nd proviso to clause (c) of section 4 of the Sales Tax Act, 1990 is reproduced hereunder:- "Provided further that the Federal Government may by a notification in the official Gazette, restrict the amount of credit for input tax actually paid and claimed by a person making a zero-rated supply of goods otherwise chargeable to sales tax."
In view of what has been stated and particularly in the light of legal propositions discussed hereinabove, titled appeal is accepted and impugned show-cause notice and consequent orders of both the authorities below being illegal and unlawful are hereby set aside.
6. The appeal is decided in the manner referred above.