ORDER: MR. SHAHID MASOOD MANZAR (CHAIRMAN).--(1). Titled appeal has been filed under section 46(1)
(a) of the Sales Tax Act, 1990 at the instance of appellant/registered person against Order-in- Appeal No. 447 of 2019 dated 24.10.2019 passed by the learned CIR(Appeals), on the following grounds:--
1. That, the alleged amount of sales tax is deferred and is still pending with the department and charge of excess refund to the extent of Rs. 66,396/- remains nowhere as this amount of refund is not received in the tax period in question and the impugned show cause notice and consequent adjudication order is made on false, incorrect and unfounded facts merits to be vacated on this score alone.
2. That, the alleged goods are not direct in use for manufacturing of taxable goods but are indirectly used for progress, promotion, advancement and enhancement of business activity and there is nothing emphatic in the Act strictly providing "direct use of any goods or services" in manufacturing process of taxable goods for the purpose of claiming of input tax credit or adjustment therefore, recovery of already refunded amount thereon is highly illegal and unjustified.
Reliance is placed on the judgment of Hon'ble Supreme Court of Pakistan in a case reported at (PTCL 2007 CL. 565).
3. That, denial of input tax credit or as the case may be input tax refund on the items/goods used in establishment, operation of manufacturing premises of the registered person meant for the purposes of taxable supplies made or to be made by the registered person is illegal and unlawful.
4. That, the alleged goods were procured from M/s. Shahzad International under the coverage of proper sales tax invoices issued in terms of section 23 of the Act duly incorporated in supplier's sales register, monthly sales tax return and summary statement for the period in question hence; its rejection is not only contrary to provisions of section 10 of the Act but also without any other lawful excuse.
5. That, appellant has supplied yarn to different registered weavers to get it converted into greige cloth on job basis accordingly against sales tax invoices for conversion charges. The said venders/ weavers have never returned leftover wastes such as polypropylene bags and paper cones, etc to the appellant as neither it is reflected in the alleged sales tax invoices nor was any such condition for return of residues stipulated in the contract for conversion of goods. Reliance is placed on the judgment of Hon'ble ATIR, Lahore reported as (2011 PTD (Trib.) 1124).
6. That, nevertheless, value of assumed supply of empty polypropylene bags and paper cones fixed by learned adjudicating authority is very high and also contrary to provisions of section 2(46)
(e) of the Act wherein, in case of doubt, only valuation committee could determine value of supply and none else.
7. That, as far as issue of non-compliance of section 73 of the Act is concerned, it is worth mentioning here that all the payments (where required) to the alleged suppliers have also been made through banking channel from the business bank account of the buyer as requisitioned under section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against invoices of such suppliers cannot be denied and sales tax refunded thereon cannot be recovered.
8. That, alleged late-filing of sales tax returns for tax periods in question is not intentional and contumacious but is due to certain financial problems which are beyond human control and respondent, being constrained by these liquidity hardships, could not file sales tax returns within time which cannot be termed as 'deliberate and intentional failure' particularly in instant case where no mala fide and willful default is attributed at his part therefore; imposition of penalty under section 33(1) of the Act is not justified as also held by superior courts in different identical cases.
Reliance is placed on (2018 PTD (Trib.) 905).
9. That, nevertheless, penalty for late-filing is imposed without considering factum of extension in due date for filing of sales tax return off and on given by the Board. If any extension in due date for filing of sales tax return for a tax period is granted, no penalty for late-filing for that months is attracted at all.
10. That, neither any charge of fake invoices, tax fraud or willful default nor charge to defraud the government has been leveled on the appellant and there is plenty of law available that in the absence of any allegation in respect of the deliberate or willful default, imposition of default surcharge and penalty is not justified. Reliance is placed on judgments of Hon'ble Sindh High Court, Karachi in case of M/s. Nizam Impex (Pvt.) Ltd reported as (PTCL 2014 CL. 426), judgment of Supreme Court of Pakistan in case of M/s. D.G. Khan Cement Factory Ltd reported as (PTCL 2004 CL 224) and judgment of ATIR, Lahore in case of M/s. KB. Enterprises, Faisalabad reported as (2019 PTD 56).
2. Succinct history of the case are that the appellant was selected for audit by the CIR under section 25 of the Act, for the tax periods from July-2016 to June-2017. On the basis of which, certain discrepancies were pointed out and resultantly, department has issued a show cause notice dated 17-10-2019 to appellant confronting sales tax liability of Rs. 4,501,691/- under section 11(2) of the Act alongwith default surcharge and penalty under section 34 and 33 ibid. In response to show cause notice, appellant filed written detailed reply duly contesting and denying the charges leveled against him but the ACIR partially vacated and partially adjudged recovery of sales tax worth Rs.
1,633,459/- alongwith default surcharge and penalty vide order dated 13-03-2019. Being discontented and aggrieved by the said order, appellant filed first appeal before learned CIR(A), Faisalabad who dismissed the appeal on exparte basis vide order dated 24-10-2019 hence, this second appeal filed before this Appellate Tribunal, Lahore Bench. Detail of the issues appealed against is as under:--
(i) Excess refund sanctioned.
(ii) Input tax adjustment not allowed under section 8(1)(a) of the Act.
(iii) Inadmissible input tax claimed on packing material.
(iv) Non-payment of sales tax on disposal of empty bags, cones & fabric wastage.
(v) Non-compliance of section 73 of the Act.
(vi) Late filing of sales tax returns.
3. We have gone through relevant case record, duly weighed arguments of rival parties and have examined factual as well as legal infirmities and improprieties arising out of the impugned orders.
It is an admitted fact that an amount of Rs. 66,396/- has not so far been sanctioned to the appellant therefore; question of any recovery of the said amount seems to be absurd and futile besides being unfounded, false, incorrect and baseless and no violation as alleged in this regard is committed at all. Even the alleged deferred refund claim was never processed and scrutinized as such, the question of sanction or grant of refund is out of mind and in all such cases, recovery proceedings can be initiated under section 11(3) of the Act against the beneficiary person only if any amount of refund is erroneously sanctioned to him but this is not the case of that nature as no refund was given to the appellant hence, its recovery is not warranted under law until and unless, it is either refunded by the Inland Revenue or adjusted by the taxpayer himself.
4. With regard to second issue of input tax adjustment not allowed under section 8(1)(a) of the Act, we need no reiteration as this division bench has already dilated upon this issue in favour of taxpayer in case of "M/s. M.K. Sons (Pvt) Ltd, Faisalabad vs. The CIR, RTO, Faisalabad" vide STA No. 269/LB/2021 dated 18.06.2021 wherein it was held as under:-- "It is not disputed that the appellant is a manufacturer of textile products and claimed input tax refund on the goods purchased with valid sales tax invoices and used the same within the business premises of the textile mill for manufacturing of taxable activity, veracity of which has not been questioned. Thus there has been created a legitimate right of input tax adjustment or refund under the provisions of section 7 read with section 10 of the Sales Tax Act, 1990 for the appellant. However, the officer denied refund of input tax to the appellant in terms of section 8(1)
(a) of the Act without any reasoning or evidence that the alleged goods were used for the purpose other than for taxable supplies and held that the adjustment made by the appellant is in violation of section 8(1)(a) of the Sales Tax Act, 1990 where under a registered person is not entitled to reclaim or deduct input tax paid on goods and services used or to be used for purpose other than for taxable supplies made or to be made by him. Though the alleged goods are not direct in use for manufacturing of taxable goods yet are indirectly used for the progress, promotion, advancement and enhancement of business activity and there is nothing emphatic in the Act strictly providing direct use of any goods or services in manufacturing process of taxable goods for the purpose of claiming of input tax credit or adjustment therefore, recovery of already refunded amount thereon is highly illegal and unjustified. The provisions of section 8(1)(a) of the Act authorize deduction for all such input tax that relate to goods that contribute directly or indirectly and even remotely towards furtherance of taxable activity. In this case of the appellant, the officer has failed to establish this crucial aspect of case; whether the appellant's goods were used for any purpose other than taxable supply. Rather on perusal of impugned order, it is found that the officer has himself admitted that the purchased items have been used by the appellant for manufacturing of taxable goods but the same are not the integral part of taxable supplies. It is also a settled preposition that once a registered person establishes that the goods/services in question on which input tax has been paid were used or to be used "directly. indirectly or even remotely" for the purpose of 'taxable activity' or for the purpose of 'taxable supplies' made or to be made by that person, then the person becomes entitled to the deduction of the said input tax paid by the person for the said purpose from the output tax that is due from the person in respect of a particular tax period in terms of section 7 of the Act. We respectfully agree with the reported judgment of Hon'ble Supreme Court of Pakistan in case of "Collector of Customs Sales Tax and Central Excise, etc vs. M/s. Sanghar Sugar Mills Ltd., Karachi" reported as (PTCL 2007 CL 565) which undoubtedly makes it clear that the goods which are used for the progress, promotion, advancement of the business activity are part of a taxable supply."
5. As far as, the third issue of inadmissible input tax claimed on packing material is concerned, suffice it to say that the right to claim or deduct input tax from the output tax having a direct nexus with the taxable activity of the registered person, in accordance with the provisions of the Act is a substantive right of a registered person and any deviation therefrom will enhance its liability. Once a registered person establishes its right of input tax paid on the goods used or to be used for the purposes of manufacture or production of taxable goods or for taxable supplies made or to be made by him then, he becomes entitled for its deduction from output tax that is due from him in respect of a particular tax period in terms of section 7 of the Act as held in the case of M/s. Sheikh Spinning Mills Ltd vs. Federation of Pakistan & 2 others reported as (PTCL 2003 CL 411 (H.C. Lah).
On similar lines, the provisions of section 7 of the Act facilitate a registered person to adjust input tax from output tax for avoidance of double taxation. A registered person is not burdened with the liability of double taxation as section 7 of the Act provides facility to him to adjust input tax from output tax due on its value of supply in terms of section 3 of the Act as held in the case of M/s. Sheikho Sugar' Mills Ltd vs. Government of Pakistan & others reported at (PTCL 2001 CL 33 (SC.
Pak). Rejection of refund purportedly in violation of section 8(1)(a) of the Act where under a registered person is not entitled to reclaim or deduct input tax paid on goods and services used or to be used for purpose other than for taxable supplies made or to be made by him. The charge is baseless, unfounded, illegal and unlawful as appellant has made taxable zero-rated supply of textiles and textile articles thereof and alleged items were wholly meant for purpose of taxable supply only as no exempt supply was made during the period in question. None of provisions of section 7(1) of the Act or section 8 ibid or even rules made thereunder provide for input tax adjustment/refund is subject to 'direct consumption' instead it defines its purpose for taxable supply only and in case, input tax paid exceeds output tax due to zero-rated local supplies or exports thereof in a tax period, excess amount shall be refunded to registered person as provided under section 10(1) of the Sales Tax Act, 1990. Therefore, demand of sales tax created against consumption of packing material is deleted accordingly. Reliance in this regard can safely be placed on the judgment of Hon'ble High Court, Lahore in case of M/s. Nishat Mills Limited vs. Federation of Pakistan, etc vide W.P. No. 54080/2020 dated 26.10.2020. The relevant excerpt of the said judgment is reproduced as under:-- "In view of the above, as the case of the petitioner is on the same footing as that of the petitioner in the aforesaid writ petition therefore, this writ petition is disposed of with direction to the!
Respondents to refund or adjust input tax paid by the petitioner on purchase of packing material."
6. With regard to fourth issue of non-payment of sales tax on disposal of empty polypropylene bags, paper cones & B-Grade fabric, we are of the firm view that the appellant supplied yarn to different registered weavers to get it converted into grey cloth on job basis accordingly against sales tax invoices for conversion charges. The said venders/weavers have never returned leftover wastes such as polypropylene bags and paper cones, etc to the appellant as neither it is reflected in the alleged sales tax invoices nor was any such condition for return of residues stipulated in the contract for conversion of goods. The appellant is able to demonstrate that property-in-goods so procured during the process of weaving rests with the weavers who disposed of such wastes subsequently and accordingly discharged its sales tax liabilities. Therefore, demand of sales tax on the same goods from the appellant would tantamount to double taxation not permissible under law. Besides above, no evidence of supply of such goods, which necessarily entails delivery of goods or receipt of money consideration thereto, has been provided without which the charge is unsubstantiated and the department constructed its case merely on assumptions and presumptions without any tangible basis. Reliance is placed on the judgments of 'this ATIR, Lahore reported as (2011 PTD (Trib.) 1124) & (PTCL 2020 CL 772).
The current scheme of sales tax is Value Added Tax (VAT) levied at each and every stage where any value is added to the goods supplied but in case of disposal of alleged empties i.e. polypropylene bags and paper cones, no value addition is made because secondhand goods/empties are supplied on lesser value as compared to the value of firsthand goods on which sales tax is already charged and paid by its manufacturer on higher value and nomore value addition hence; no sales tax on any stage of its subsequent supply. Since, the manufacturer of such empties has already paid sales tax thereon at a higher value therefore, re-sale of the same on value lesser than the taxed one would result in double taxation. Reliance in this regard is placed on the judgment of Hon'ble High Court, Lahore reported as (2003 CLC 513) wherein it was laid down that no tax or fee to be levied twice on the same goods as per golden rule of interpretation of fiscal statute.
Even otherwise, the appellant has never declared any waste of fabrics in meterage in made-ups conversely, there is no doubt that cutting and stitching waste is occurred in its manufacturing process which is disposed of and sold in kilogram instead of meterage and its rate is too low as compared to fabrics sold in meters hence, recovery of sales tax computed on the basis of meterage stands hypothetical and presumptive and thus remains in thin air.
Furthermore, in case of any conflict in value of taxable goods, then there exits an elaborative procedure for its determination as is given in clause (e) of sub-section (46) of section 2 of the Act.
In this section, it is objectively provided that in a case where there is sufficient reasons to believe that value of a supply has not been correctly declared in the invoice, the value could only been determined by the valuation committee comprising representative of trade and the Inland Revenue as constituted by the CIR and none else. Sales tax is relatable to the value of supply, which in case of conflict, has to be determined in accordance with the procedure delineated in section 2(46)(e) of the Act as also held by Hon'ble High Court, Lahore in case of "M/s. Pepsi Cola International (Pvt) Limited vs. Federation of Pakistan and others" reported as (PTCL 2017 CL 80).
7. On issue of non-compliance of section 73 of the Act, there is no doubt that the appellant in the instant case has transacted the payments to his suppliers through banking channel by complying with the mandatory provisions of section 73 of the Act and no violation whatsoever has been committed therefore, input tax credit against invoices of the alleged suppliers cannot be denied and sales tax refunded thereon cannot be recovered.
8. Last but not the least that in the context of penalty for late filing of returns, the initial onus of proving of mens rea is on the department. The imposing of penalties in case of committing default in payment of tax or late filing of sales tax returns is not automatic and some determination which regard to element of mens rea is required and the presence of mens rea is essential for imposition of any penalty under the law. Mens rea in short denotes the state of mind that would compel a person to deviate from the law or to commit an offence which also encompasses recklessness within its ambit. Concept of mens rea basically resolves around the state of mind and the conduct of the person. It is necessary to establish mens rea before levying penalty and imposition of penalty is a quasi criminal and the presence of mens rea is mandatory however, no material is available on record to the effect that the late filing of sales tax returns was mala fide or willful act on part of registered person. The Assessing Officer has failed to establish mens rea and male fide on the part of the appellant, which is a necessary ingredient for imposing penalty therefore, imposition of penalty for late filing of sales tax returns under section 33(1) of the Act is illegal and not sustainable under law.
9. In view of what has been stated and particularly in the light of legal propositions discussed hereinabove, the 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.
10. The instant appeal filed by the Registered Person is disposed of in the manners as indicated above.