ORDER: MR. SHAHID MASOOD MANZAR (CHAIRMAN).--(1). Titled appeal has been filed under section 46 of the Sales Tax Act, 1990 at the instance of appellant/registered person calling in question the Order- in-Appeal No. 273 of 2020 dated 12.11.2020 passed by the learned CIR(A), Faisalabad on the following grounds:--
(1) That, impugned show cause notice is illegal and void as the ACIR has invoked different penal provisions of law simultaneously which reflects the mechanically worded approach as each provision has different implications of law and circumstances. A vague, unspecific and too general show cause notice may not enable the reader or the notified person to make out or clearly identify the particular clause or sub-section or the reason etc., applicable to the case of the appellant.
Reliance is placed on the judgments reported as (2016 PTD (Trib.) 485) & (PTCL 2017 CL 239).
(2) That, denial to allow input tax credit or as the case may be input tax refund on the items/goods used in establishment/operation of the manufacturing facility/premises of registered person meant for the purposes of taxable supplies made or to be made by the registered person is ultra vires the provisions of the Sales Tax Act, 1990.
(3) That, the alleged goods are though 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. Reliance is placed on the judgment of Hon'ble Supreme Court of Pakistan in a case reported at (PTCL 2007 CL 565).
(4) That, nevertheless, provisions of Section 8(1)(a) of the Sales Tax Act, 1990 authorize deduction for all such input tax that relate to goods that contribute directly or indirectly and even remotely towards furtherance of taxable activity, hence, any taxable purchases which are solely used within the business premises of the appellant for manufacturing of taxable goods are available for adjustment. Reliance is placed on the judgment Hon'ble ATM, Lahore reported as (PTCL 2012 CL 475).
(5) That in similar situation and identical circumstances, Hon'ble Peshawar High Court, Peshawar in a case reported as (2005 PTD 2012) has held that the machinery spare parts and lubricants are used to facilitate the production/manufacturing of the end product, therefore, the appellants could claim input tax credit on the machinery spare parts and lubricants, even if they are not direct constituent and integral part of the Textile yarn/end product.
(6) That, it is not out of question to mention here that no condition of direct relationship of input goods to manufacturing of finished goods is provided in section 8(1)(a) of the Act however, condition of its use for the purpose of making of taxable supplies is specified therein and the appellant do qualify for entitlement of input tax credit on the goods in question as the same are not used for any purpose other than for taxable supplies because all of supplies made by the appellant are restricted to taxable supplies only. Reliance is placed on the judgment Hon'ble ATIR, Lahore reported as (PTCL 2014 CL 194).
(7) That, the keyword used in section 7 and section 8(1)(a) of the Act is "purpose which meant that input tax could be deducted on goods used for the purpose of taxable supplies. In order to determine whether input tax is admissible in a particular case it has to be seen whether the goods were used for the `purpose' of taxable supplies. It is not necessary that they should be an integral part thereof. Once a registered person established that the goods in respect of which he claimed input tax adjustment were used for the 'purpose' of taxable supplies, he would be entitled to the refund of input tax. Reliance is placed on the judgment of Hon'ble Sindh High Court, Karachi reported as (PTCL 2006 CL 673).
(8) That, it is also worthwhile to mention here that Hon'ble Lahore High Court has already set aside the Notification No. S.R.O. 450(1)/2013 dated 27th May, 2013 providing negative list of items against which input tax is not allowed in W.P. No. 4231/2015 dated 10-11-2016 in case of "M/s. JD* Sugar Mills Limited vs. Deputy Commissioner Inland Revenue and others".
(9) That, under the scheme of VAT mode of taxation, a taxpayer enjoys proprietary interest/right of deduction of input tax from output tax. Input tax is the property of the buyer which is paid to the supplier so that the same can be deducted at the time of supply of goods by the buyer and restricting a buyer from deducting input tax from output tax impinges on the right of property (input tax) guaranteed to taxpayer uncle the Constitution (Articles 23 and 24) and thus cannot be sustained.
(10) That, there can be no sales tax on the disposal of the fixed assets, because the fixed assets do not fall within the ambit/definition of goods as envisaged under taxable activity as provided in section 2(35) of the Act as held by the Sindh High Court, Karachi in case of M/s. Novartis Pakistan Ltd reported at (PTCL 2002 CL 50). Moreover, no input tax was claimed/adjusted on purchase of such goods therefore, charging of sales tax on its subsequent disposal is not just and fair in terms of Serial No. 6 of Table-2 given under the Sixth Scheduled annexed with the Sales tax Act, 1990 and obliviously resulting in double taxation not permissible under law as held by the Hon'ble Appellate Tribunal, Lahore in case of M/s. Nestle Milk Pak Ltd reported as (PTCL 2001 CL 627).
(11) That, neither any charge of 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), and judgment of ATIR, Lahore in case of M/s. K.B. Enterprises, Faisalabad reported as (2019 PTD 56).
2. Succinctly stated, facts of the instant case are that during post audit of refund files for the tax periods from July, 2015 to June, 2016, the Inland Revenue Audit Officer observed that the appellant has received refund of input tax which was not admissible to him under clauses (a), (b), (e), (f), (g),
(h) & (i) of section 8(1) of the Act read with S.R.O. 490(1)/2004 dated 12-062004 as amended vide S.R.O. 450(1)/2013 dated 27-05-2013. Resultantly, the appellant was called upon to show cause notice dated 26-02-2020 under section 11(5) of the Act as to why sales tax worth Rs. 16,006,064/- may not be recovered under section 11(2) of the Act alongwith penalty and default surcharge under section 33(9) and 34 ibid. In this way, the appellant was also charged with the violation of sections 2(9), 2(44), 3, 3(1A), 6, 7, 8(1)(a), 22, 26 and 73 of the Act. In response to show cause notice, appellant filed written reply supported with documentary evidences but upon culmination of adjudication proceedings, the ACIR partially accepted the stance of appellant by vacating demand of sales tax of Rs. 8,544,916/- and adjudged liability of sales tax worth Rs. 7,461,148/- vide order-in-original No. 40/2020 dated 16-04-2020. Being aggrieved by the said order, the appellant went in first appeal before the learned CIR(A) whereby, he vide order dated 12-11-2020 also partially accepted the stance of appellant and partially rejected the appeal on the issue No. 2 (Rs. 934,169) & No. 4 (Rs. 934,122) aggregating to Rs. 1,868,291/-The appellant being discontented and aggrieved by the said order has now filed the second appeal before this Appellate Tribunal.
3. The learned counsel for the appellant has contended that the learned CIR(A) has not taken the cognizance of the legal and factual aspects as well and not appreciated the case laws cited on the subject matter and decided the appeal in a summary manners. Learned counsel assailed that the officer has failed to consider the provisions of section 8(1)(h) which provides the alleged items to be claimable/adjustable if the same are used for the manufacturer of taxable goods. Since the purchased goods were used for the purpose of taxable goods, hence the legitimate right provided under section 7(1) of the Act, 1990 cannot be taken away. The learned AR while arguing his case explained that the appellant is a manufacturer of textile products and had purchased goods with valid sales tax invoices from the operative taxpayers and the goods purchased had been used within the business premises of the appellant for carrying out the taxable activity and there was no other purpose except supply of taxable goods, hence the goods purchased had direct nexus with taxable activity. The AR further stated that SRO 490(1)/2014 dated 12-06-2014 as amended with SRO 450(I)/2013 dated 27-05-2013 has been translated into clause (h) and (i) of section 8 of Act, 1990 inserted through Finance Act, 2014 and clause (h) is categorically clear that goods acquired for direct use in the production or manufacture of taxable activity shall be excluded from the purview of section 8(1)(h) read with SRO 490(1)/2004 dated 12-06-2004 as amended with SRO 450(1)/2013 dated 27-05-2013. The clause 8(1)(h) specifically mentions building material which is used in or permanently attached to immovable property and has defined such goods and their usage as building and construction material, paints, electrical and sanitary fitting, pipes wires and cable but the legislature excluded temporary and pre-fabricated building and such goods acquired for sale or re-sale or for direct use in the production or manufacturer of taxable goods. In support to his contentions, learned AR placed reliance on a reported judgment of Hon'ble Supreme Court of Pakistan (PTCL 2007 CL 565). He further placed reliance on a reported judgment of Hon'ble Sindh High Court, Karachi (2005 PTD 2012), judgments of ATIR, Lahore reported as (2014 PTD (Trib.) 558) & (PTCL 2019 CL 719), judgment of ATIR, Karachi reported as (2019 PTD (Trib.) 1166) and argued that the provisions of section 8(1)(a) of the Act, 1990 allows deduction for all such input tax that relate to goods that contribute directly or indirectly and even remotely towards furtherance of taxable activity. On the strength of these assertions, learned counsel seeks vacation of the impugned orders passed by the authorities below.
4. The learned DR on her turn, defended the orders passed by both the authorities below and argued that the appellant has claimed input tax against the goods which were neither integral part of the taxable supply nor there is a direct nexus between the product manufactured and supplied as the goods in question are not part of the supply chain. She, however, could not controvert the arguments with cogent reasoning's.
5. The arguments of the learned representatives of both the rival parties have been heard, the orders of the authorities below as well as relevant record and relevant provisions of law and the case laws cited by the learned AR of the taxpayer have also been perused carefully.
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 establish 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 A `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. The relevant paragraph of the said judgment is reproduced hereunder:-- "It is abundantly clear that the taxable supply has not been confined or limited to the one which is the product or the goods manufactured but also including those goods which involve in some way with the progress, promotion, advancement of business activity/taxable activity."
The officer has further observed the law places bar on adjustment of input tax on cement, wires & cables, PVC pipe, paint, steel sheets, flat products, electrical goods & parts and CU, etc even if the goods purchased by the appellant are used for the progress, promotion, advancement and enhancement of business activity as the same are not directly involved in the business of appellant. Again, the observation of the officer is contrary to the clause 8(1)(h) of the Sales Tax Act, 1990 as the same clause does not put any restriction on adjustment of subject goods if they are used in the manufacturing activity for the purpose of taxable goods. The officer has erred in holding that the alleged goods are not admissible for input tax refund unless the same are part of supply chain and directly used in the production/manufacturing. On the contrary, clause 8(1)(h) of the Act, does not provide any word like part of supply chain or direct product, hence, the officer has erred to apply his mind and has misinterpreted the above clause which is unjust and unfair. The officer however admitted that the alleged goods were brought for the improvement of business but it was not directly related to the taxable supply of the appellant. The keyword used in both section 7 and section 8(1)(a) of the Act is "purpose" which meant that input tax could be deducted on goods used for the purpose of taxable supplies made or to be made. In other words, issue of adjustment of input tax was to be resolved with reference to the actual use of input in making of taxable supplies and criterion of integral part is not valid. The expression "purpose" has a very wide application and according to dictionary meaning the same refers to what something is supposed to be achieved. In this case, there is no doubt that alleged goods were used to facilitate the production and manufacturing of the end product and were placed to achieve the growth in the business and that fulfils the requirement of "purpose" as used in the relevant provisions of law. In similar situation and identical circumstances, Hon'ble Sindh High Court, Karachi in case of "Collector of Sales Tax vs. M's. Dhan Fibre Limited" reported as (2005 PTD 2012) has laid down as under:-- "The machinery spare parts and lubricants are used to facilitate the production/manufacturing of the end product, therefore, the appellant could claim input tax credit on the machinery spare parts and lubricants, even if they are not direct constituent and integral part of the Textile yarn/end product."
On perusal of section 8(1)(a) of the Act, it is found that no condition of direct relationship of input goods to manufacturing of finished goods is provided therein however, condition of its use for the purpose of making of taxable supplies is specified and the appellant do qualify for entitlement of input tax credit on the goods in question as the same are not used for any purpose other than for taxable supplies because all of supplies made by the appellant are restricted to taxable supplies only hence, denial of input tax credit or refund on the items/goods meant for the purposes of taxable supplies made or to be made by the registered person is illegal and against the provisions of law. The ratio decidendi by the Hon'ble Sindh High Court, Karachi in case of "M/s. Ghandhara Nissan Diesel Ltd -vs. Collector, Large Taxpayers Unit and 2 others" reported as (PTCL 2006 CL 673) is the most relevant in all fours to the case at instance of the registered person. The relevant extract of the said judgment is reproduced hereunder:-- If the word purpose is considered in ordinary plain meaning, it would appear that the intention of legislature, apparent from the language is that if any input tax is paid with the intention that the goods on which such input tax is paid shall be used in the end products or taxable supplies made or to he made. then the registered person shall be entitled to deduct the same from the output tax. It is nowhere provided that deduction of input tax on such goods only, shall be allowed which are the direct constituent and integral part of taxable goods produced, manufactured or supplied."
In another case like the present one, a Division Bench of ATIR, Lahore in a judgment reported as (2014 PTD (Trib.) 558), held as under:- "The alleged good were not used for any purpose other than taxable supplies and provisions of section 8(1)(a) of the Act are not attracted nor the entitlement of input tax thereon is precluded by a notification under section 8(I)(b) of the Act therefore, denial from input tax adjustment or the case may be credit paid on such goods is illegal and unlawful and utter violation of mandatory provisions of law. It is not out of question to mention here that no condition of direct relationship of input goods to manufacturing of finished goods is provided in section 8(1)(a) of the Act however, condition of its use for the purpose of making of taxable supplies is specified therein and the respondent do qualify for entitlement of input tax credit on the goods in question as the same are not used for any purpose other than for taxable supplies because all of supplies made by the respondent is restricted to taxable supplies only. The learned officers of intelligence and investigation were not well-versed with the use of kerosene oil which is used in the purposes of making pulp from raw materials like straw. husk and raddi, etc. which is, use of making of paper and paper board products. Since, kerosene is wholly used for the purpose of taxable supplies only therefore; no recovery can be made from the respondent."
There can be no sales tax on the disposal of the fixed assets because the fixed assets do not fall within the ambit/definition of goods as envisaged under taxable activity as provided in section 2(35) of the Act as held by the Sindh High Court, Karachi in case of M/s. Novartis Pakistan Ltd reported as (PTCL 2002 CL 50). Moreover, no input tax was claimed/adjusted on purchase of such goods therefore, charging of sales tax on its subsequent disposal is not just and fair in terms of Serial No. 6 of Table-2 given under the Sixth Scheduled annexed with the Sales tax Act, 1990 and obliviously resulting in double taxation not permissible under law as held by the Appellate Tribunal, Lahore in case of M/s. Nestle Milk Pak Ltd reported as (PTCL 2001 CL 627).
In view of what has been stated above, particularly in the light of law and judgments of superior courts quoted supra, the impugned show cause notice and consequent orders passed by both the authorities below are declared to be illegal and unlawful hence, are hereby set aside.
6. The appeal is decided in the manners as above.