ORDER: MR. MUHAMMAD TAHIR (ACCOUNTANT MEMBER).--(1). Titled appeal filed at the instance of the registered person has been directed against order-in-appeal No. 239 of 2021 dated 30-11-2021 passed by the learned CIR(Appeals), Faisalabad.
2. Brief facts giving rise to the filing of the present appeal are that during post audit of refund files for the tax periods from July-2016 to June-2017, certain discrepancies were noted. Therefore, proceedings were initiated by way of issuance of show cause notice dated 01-07-2021. for recovery of already refunded amount of sales tax worth Rs. 1,125,985/- was issued under section 11(2) of the Act. In this way, appellant was charged with violation of sections 3, 3(1A), 6, 7, 8, 10, 22, 23, 26 and 73 read with S.R.O 555(1)/2006 dated 06-06-2006 alongwith default surcharge and penalty under sections 34(1) and 33(16)(19) ibid. The contravention proceedings initiated against the appellant culminated in passing an assessm ent order dated 12-07-2021 whereby the alleged demand was reduced to the extent of Rs. 683,628/- against allegations of (i) inadmissible input tax refund received in violation of SRO 490(1)/2004 dated 12-06-2004 (ii) Inadmissible input tax adjustment against consumption of lubricant oil. Feeling aggrieved by the said order, the appellant went in appeal before the learned CIR(Appeals), which was rejected. Hence, the registered person/appellant has come up in further appeal before this Tribunal.
3. Mr. Khubaib Ahmad, Advocate is present on behalf of the registered person, whereas none has tendered appearance on behalf of the department despite proper service of notice. Therefore, exparte proceedings are conducted by way of deciding the instant appeal on merits.
4. Learned counsel appearing on behalf of the registered person has termed the action of both the authorities below to be arbitrary by arguing that input tax paid on insurance services is allowed under section 7(1) of the Act being not hit by the provisions of section 8(1)(a) of the Act as in the instant case, the appellant being an exporter, not making any exempt supplies, has wholly used the same for the purpose of taxable supplies and the said services have also not been included in the list of negative items notified under Notification No. S.R.O. 490(1)/2004 dated 12th June, 2004 as amended vide Notification No. S.R.O. 450(1)/2013 dated 27th May, 2013 hence, input tax against insurance services cannot be denied. Learned counsel further argued that FBR, Islamabad vide its Letter C. No. 1(5)/FED/2009/167850-R dated 12th December, 2011 has also clarified that a registered person is entitled to claim adjustment/credit of input tax on 'insurance services' provided by the Insurance Companies. In support of his stance, learned AR produced copy of FBR's letter dated 12- 12-2011, Copy of S.R.O. 450(1)/2013 and S.R.O. 490/2004, judgment of this Appellate Tribunal in case of "The CIR (Zone --III), RTO, Faisalabad vs. M/s. Kamal Textile Mills, Faisalabad" vide STA No. 79/LB/2014 dated 20-04-2021, copies of sales tax invoices and copies of cheques alongwith bank statements On the second issue, it was forcefully urged by the learned counsel that the appellant has purchased lubricant oil and grease which are used in industrial machines for manufacturing of zero-rated goods, under the coverage of proper sales tax invoices issued in terms of section 23 of the Act duly incorporated in suppliers' sales registers, monthly sales tax returns and summaries for the periods in question hence its denial is not only contrary to provisions of section 10 of the Sales Tax Act, 1990 but also without any other lawful excuse. Learned counsel argued that charge of violation of Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure, 2007 an amended vide SRO 896(1)/2013 is basically misconstrued and mis constructed by the learned tax functionaries in its favour because the Federal Government has not exempted the alleged goods of lubricant oil and grease from levy of sales tax under section 13 of the Act read with the Sixth Schedule annexed with the Sales Tax Act, 1990. Learned counsel also contested that FBR vide its letter C. No. 1(14)STM/2018/10312-R dated 23rd January 2019 has also directed to the Chief Commissioner, Regional Tax Office, Faisalabad that sales tax refund claims of the claimaned relating to claim of input tax on lubricants, etc. may be processed and disposed of on merits as per law. Lastly, he contended the Hon'ble High Court, Lahore has declared the Notification No. S.R.O. 896(1)/2013 dated 04-10-2013 without lawful authority at of no legal effect in W.P. No. 5186/2014 in case of "M/s. Siddique Brothers (Pvt.) Ltd. vs. Federation of Pakistan & others". support of his stance, learned AR produced copy of FBR's letter dated 23-01-2019, judgment of Hon'ble High Court, Lahore case of M/s. Siddique Brothers (Pvt.) Ltd. vs. Federation Pakistan, etc. vide W.P. No. 5186/2014, judgment of Hon'ble Peshawar High Court reported as (2005 PTD 2012), judgment Hon'ble Supreme Court of Pakistan reported at (PTCL 2007 CL. 565), copies of sales tax invoices and copies of cheques alongwith bank statements. On the strength of these assertions, learned counsel seeks vacation of the impugned orders passed by the authorities below.
5. After having heard the arguments of the learned counsel for the appellant and from the bare perusal of the relevant orders as well as relevant provisions of law and material made available before us, it is found that input tax credit on services rendered and provided to the appellant is very much available for refund or adjustment in terms of section 2(14)(d) of the Act which clearly reveals that "input tax", in relation to a registered person, means, provincial sales tax levied on services rendered or provided to the person. The input tax on "insurance services" has also been allowed under section 7(1) of the Act being not hit by the provisions of section 8(1)(a) Of the Act as in the instant case, the appellant not making any exempt supplies, has wholly used the same for the purpose of taxable supplies and the said services have also not been included in the list of negative items notified under section 8(1)(b) of the Act that is how, the Federal Board of Revenue vide its Letter C. No. 1(5)/FED/2009/167850-R dated 12th December, 2011 has also clarified that a registered person is entitled to claim adjustment/credit of input tax on insurance services provided by the Insurance Companies. Under section 8(1)(b) of the Act; the Federal Government through a delegated authority had restricted & prohibited the claim of input tax adjustment by notifying items' which do not relate to taxable supplies however, the alleged insurance services have not been included in the list of negative items notified under Notification No. S.R.O. 490(1)/2004 dated 12th June, 2004 as amended vide Notification No. S.R.O. 450(1)/2013 dated 27th May, 2013 therefore, input tax paid against insurance services cannot be learned to the appellant.
2.(sic) We need no reiteration on the issue of insurance services as a division bench of this ATIR, Lahore already has dilated upon this issue in favour of the taxpayer in case of "The CIR (Zone--III), RTO, Faisalabad vs. M/s. Kamal Textile Mills, Faisalabad" vide STA No. 79/LB/2014 dated 20-04- 2021 wherein while relying upon the letter of FBR dated 12-12-2011 has held as under:-- "The input tax on "insurance services" has been allowed under section 7(1) of the Act being not hit by the provisions of section 8(1)(a) of the Act as in the instant case, the respondent being an exporter, not making any exempt supplies, has wholly used the same for the purpose of taxable supplies and the said services have also not been included in the list of negative items notified under section 8(1)(b) of the Act that is how, the Federal Board of Revenue vide its Letter C. No. 1(5)/FED/2009/167850-R dated 12th December, 2011 has also clarified that a registered person is entitled to claim adjustment/credit of input tax on insurance services provided by the Insurance Companies."
6. The appellant has purchased lubricant oil and grease under the coverage of proper sales tax invoices issued in terms of section 23 of the Act duly incorporated in suppliers' sales registers, monthly sales tax returns and summaries for the periods in question which were used for smooth operation of plant and machinery having direct nexus with the production of taxable goods therefore, denial of input tax is not only contrary to provisions of law but also without any other lawful excuse. Further on perusal of section 7 of the Act, it is found that a registered person is entitled to deduct input tax paid, on acquisition of goods used or to be used for the purpose of taxable supplies from output tax due thereon therefore, sales tax paid on input goods become due for refund under section 10 of the Act. Accordingly, the appellant claimed refund of input tax paid on the alleged goods as much as the same were used for the purpose of making of taxable supplies. On this issue, the Federal Board of Revenue, Islamabad vide its letter C. No. 1(14)STM/2018/10312-R dated 23rd January, 2019 has also directed to the Chief Commissioner, Regional Tax Office, Faisalabad that sales tax refund claims of the claimants relating to claim of input tax on "lubricants", etc. may be processed and disposed of on merits as per law.
7. Under section 8(1)(b) of the Act; the Federal Government through a delegated authority had restricted & prohibited the claim of input tax adjustment by notifying items' which do not relate to taxable supplies however, the alleged goods i.e. lubricant oil and grease have not been included in the list of negative items notified under Notification No. S.R.O. 490(1)/2004 dated 12th June, 2004 as amended vide Notification No. S.R.O. 450(1)/2013 dated 27th May, 2013 hence, input tax paid against purchase of lubricant oil and grease cannot be denied to the appellant.
8. Notwithstanding above, the goods not directly used for manufacturing of taxable goods but are otherwise 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" in manufacturing process of taxable goods for the purpose of claiming of input tax credit or adjustment therefore; recovery of sales tax thereon is highly illegal and unjustified. No doubt, it not only defeats "the purpose" of the Act but it is also found contrary to the law already laid down by the Hon'ble Supreme Court of Pakistan in case of "Collector o 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."
9. As far as, the departmental contention that as per Rule 58T(5) of Chapter XIII of the Sales Tax Special Procedure Rules, 2007 as amended vide Notification No. SRO 896(1)/2013, the specified goods on which extra sales tax has been paid in the aforesaid manner shall be exempt from payment of sales tax on subsequent supplies is concerned, suffice to say that it is the Federal Government who may specify the goods to be exempted from levy of sales tax under sub-section
(1) of section 13 of the Act read with the Sixth Schedule but the alleged goods of lubricant oil and grease have never been provided in the list of exempted goods as available in the Sixth Schedule annexed with the Sales Tax Act, 1990 hence, purchases of the alleged goods by the appellant, being not exempted under section 13 of the Act or being not specified in the Sixth Schedule were chargeable to sales tax thus, the appellant has rightly claimed and adjusted input tax paid thereon. Even otherwise, whole exercise of creating demand of sales tax has been carried out under the Notification No. S.R.O. 896(1)/2013 dated 04-10-2013 which has already been declared without lawful authority and of no legal effect by the Hon'ble Lahore High Court in W.P. No. 5186/2014 in case of "M/s. Siddique Brothers (Pvt.) Ltd. vs. Federation of Pakistan & others".
10. 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 by way of acceptance of the appeal preferred by the registered person. We order accordingly.