MIAN TAUQEER ASLAM JUDICIAL MEMBER. The titled appeal has been filed registered person calling in question the impugned Order-in-Appeal No.64/2021 dated 08-07-2021, passed by the learned CIR(A), Gujranwala.
2. Briefly stated, the relevant facts are that during the course of scrutiny of sales tax returns for the tax periods from December 2017 to August 2020 by the audit team of the Office of the Directorate General Revenue, Receipts Audit, Lahore, it was found that the appellant has failed to deduct sales tax worth Rs.3,639,759/- in respect of purchases A made from un-registered persons contrary to the provisions of the Rule 1(2)(d) read with Rule 3(ii) of the Sales Tax Special Procedure (Withholding) Rules, 2007 issued through Notification No. S.R.O. 660(l)/2007 dated-30-06-2007. The appellant was liable to deduct and to pay sales tax at the rate of 1% of the value of taxable supplies received from unregistered persons for the period upto 30th June, 2019. However; afterwards with effect from 01.07.2019, the appellant being a company as defined in the Income Tax Ordinance, 2001 as also registered for the purpose of Sales Tax and Federal Excise Duty or Income Tax was liable to withhold and to deduct sales tax at the rate of 5% of the gross value of supplies made to him by the unregistered persons as provided under Sr. No.4 of the Eleventh Schedule annexed to the Sales Tax Act, 1990 ("the Act"). Thus, it was observed that the appellant has failed to discharge his legal obligations causing non-deduction of sales tax worth Rs.3,639,759/-. Accordingly, the registered person was called upon to show-cause notice as to why the above said unpaid amount of sales tax may not be recovered under sections 11(2) and 11(4A) of the Act along with default surcharge and penalty. In response, the registered person had submitted written reply along with supportive documents but, the assessing officer had adversely adjudged the confronted sales tax liability through Order-in-Original No. 04/2021 dated 18.03.2021. Being aggrieved, the first appeal was preferred before the Commissioner of Appeals, Gujranwala who has upheld impugned demand through his Order-in-Appeal No. 875/2020 dated 08-09-2020 without applying his independent judicial mind. Feeling aggrieved by this treatment, appellant has come up in the second appeal before this Tribunal.
3. Being aggrieved, the appellant filed the first appeal before the CIR(A) upheld impugned order vide Order-in-Appeal dated 08.07.2021. Felt, aggrieved, the registered person filed the instant second appeal before this Tribunal on the grounds as set forth in the memo of appeal.
4. The learned AR vehemently contested impugned show-cause notice and consequent orders wherein; appellant was allegedly required to make deduction of withholding tax as envisaged under sub-rule 3(ii) of Rule-2 of Sales Tax Special Procedure (Withholding) Rules, 2007 through Notification No. S.R.O. 660(1)/2007 dated 30th June, 2007 at the rate of 1% as amended through Notification No. S.R.O. 897(1)/2013 dated 04-10-2013. A registered person is required to withhold sales tax on payments made in respect of taxable goods purchased from the persons liable to be registered but not actually registered under the Act. It is contended by the learned AR that the appellant has either purchased exempt goods or has otherwise; procured the same from the persons falling in cottage industry as defined under section 2(5AB) not liable to be registered under the Act. Since, the goods purchased by the appellant were exempt goods therefore; he was not required to withhold sales tax on payments for purchases made to the persons not liable for sales tax registration under the Act as the goods supplied by him were not subject to sales tax as being exempted under the Act. He further added that payments made against purchases of raw material, used for manufacturing of paper board; such as wheat straw falling in H.S. Code 1213 (cereal straw and husk) of the Pakistan Customs Tariff were exempt from levy of sales tax. Learned AR of appellant further assailed that wheat straw is/was otherwise; exempted from levy of sales tax as per Sr. No. 10 of the Table-II of Sixth Schedule of the Act therefore; appellant was not legally required to withhold sales tax on such payments as incurred on its purchases made during the tax periods of December-2017, July 2018 to June-2019 and September 2019 to December 2019. No sales tax was liable to be withheld and to be deducted at source from the payments made in respect of exempt purchases. In support of his arguments, the learned AR has also relied upon the judgment of Hon'ble Sindh High Court, Karachi through its C.Ps Nos. D-90 along with D-91 to 95, 1712 to 1715, 2892 to 289(sic), 2897, 2899 to 2907, 5550, 6833 and 683(sic) of 2016 dated 01.07.2017 wherein, "Glass Bangles Manufacturers" impeded with levy of extra tax has invoked its constitutional jurisdiction. The Court has interrupted with this situation that no extra tax can be charged from the manufacturers of glass bangles which are primarily exempt from levy of sales tax under Sr. No. 29C of the Sixth Schedule annexed to the Act, since its inception. Based on this dictum, the AR submitted that the appellant was not required to deduct and to withhold sales tax on payments made in respect of exempt goods not primarily subject to levy of sales tax under the Act.
5. The learned AR further submitted that the condition for chargeability of withholding sales tax regarding purchases from [un-registered person] was amended with effect from 01-07-2020 and onwards, it is for the companies as defined in the Ordinance, 2001 (XLIX of 2001) to deduct and to withhold sales tax on the payments made to the [persons other than active taxpayers].
Accordingly; the active taxpayer is also defined whose definition as given under Section 2(1) of the Act is reproduced hereunder for the ease of reference:-- "Active Taxpayer" means a registered person who does not fall in any of the following categories, namely:--
(a) Who is blacklisted or whose registration is suspended in terms of section 21;
(b) Fails to file the return under section 26 by the due date for two consecutive tax periods;
(c) Who fails to file an income tax return under section 114 or statement under section 115, of the Income Tax Ordinance, 2001 (XLIX of 2001), by the due date; and--
(d) Who fails to file 2 [quarterly] or an annual withholding tax statement under section 165 of the Income Tax Ordinance, 2001; Based on above, it is submitted by the AR that it is clear that withholding sales tax liability for the period after this amendment with effect from 1st July, 2020, could not be created on the payments made for taxable goods procured from [un-registered persons] as withholding sales tax was otherwise; required to be deducted by the companies from the payments made to registered persons who are not found active taxpayer at e-portal of the Federal Board of Revenue therefore; withholding sales tax liability for July, 2020 and August, 2020 stands illegal, unlawful and without any jurisdiction. The AR of the appellant argued that based on this amended law, now a company has become liable to deduct and to withhold sales tax on payments made to registered persons who are not found active taxpayer at e-portal of the Federal Board Revenue. As such, no withholding tax was to be deducted anymore from the payments made to unregistered persons instead it is made chargeable from the registered persons who are otherwise; found non-active at e-portal of the Federal Board Revenue.
6. The learned AR has also assailed imposition of penalty which is not justified unless it is proved that the said omission was either willful or based on mala fide. In fact, payment made by appellant was against the supplies of agricultural produce which were exempt as per Sr. No. 10 of Table-2 of the Sixth Schedule of the Act. Since; no sales tax was required to be withheld and this shows that no loss of revenue has occurred and no willful evasion or mala fide was involved on the part of the appellant not to be impeded with the burden of undue penalties in the given circumstances of the case.
7. On the other hand, the learned DR has assailed the contentions of the AR on similar grounds and charges as levelled earlier in impugned show-cause notice as well as adjudged in consequent
8. We have heard the arguments of both sides and have perused the available record. Before rendering any conclusion on the subject matter, it is very relevant and pertinent to separate the purchases of "wheat straw falling at Custom Tariff HS CODE, 1213" from that of "paper waste falling at HS Code No.47.07 of Pakistan Customs Tariff" as the former is exempt from levy of sales tax under Sr. No.10 of the Table-2 of the Sixth Schedule annexed to the Act and the later, during that very period, was subject to levy of sales tax at the reduced rate of 5% under Sr. No.19 of the Eight Schedule annexed to the Act. This segregation was ought to be made at original adjudication stage or at least at the first appellate stage yet it is very imperative to place on record at this juncture of time that purchases made during the periods of December-2017, July-2018 to June- 2019 and September-2019 to December-2019 are consisted of wheat straw falling at HS CODE No. 1213 whereas all the purchases for the rest of tax periods are consisted of paper waste filling at HS CODE No: 47.07 of Pakistan Customs Tariff. Now the core issue left with us is to decide as to whether withholding sales tax is deductable on payments made in respect, of wheat straw and its counterpart purchases of paper wastes.
9. After due consideration of the matter, we hold that the purchases of "wheat straw" falling in the Customs Tariff HS CODE 1213 consisted of cereal straws and husks made during the tax periods of December 2017, July-2018 to June-2019 and September 2019 to December 2019 were exempt from levy of sales tax under Sr. No.10 of Table-2 of the Sixth Schedule annexed to the Act. The wheat straw is admittedly an agricultural produce not subject to levy of sales tax as such; no deduction of withholding tax on payments made in its respect was warranted under law. Conversely, withholding sales tax is always liable to be deducted on taxable goods and no such deduction is required to be made in case of payments on account of the goods exempted from sales tax.
10. Based on above demarcation of wheat straw from paper wastes, it is now easy to hold here that wheat straw, being an agriculture produce, is exempt from levy of sales tax under Sr. No. 10 of Table-2 of the Sixth Schedule annexed to the Act therefore; no withholding sales tax was required to be deducted on payments made in its respect. The AR has rightly relied upon the above referred judgment which is very relevant to the subject matter and its extract as related to the case at instance is reproduced as under:-- "Petitioners were glass bangles manufacturers and they were aggrieved of recovery of extra tax at 5% in electricity and gas bills on the ground that they had not obtained sales tax registration number. Levy of extra tax at the rate of 5% of total billed amount excluding amount of federal taxes in addition to tax payable under S. 3(1) of Sales Tax Act, 1990 was imposed on supplies of electric power and natural gas to person having industrial or commercial connections and whose bill for any month exceeded Rs. 15,000/- but who had either not obtained sales tax registration number or were not an active taxpayers list maintained by Federal Board of Revenue. Provisions of Notification No S.R. O. 509(1)12013 dated 12-06-2013 were not applicable to petitioners who enjoyed exemption in terms of S.13 read with items 29C of Sixth Schedule to Sales Tax Act, 1990 from payment of sales tax, as they were not making any taxable supplies in terms of S.2(1) of Sales Tax Act, 1990. Constitutional petition was allowed in circumstances."
11. Similarly, the appellant has contested that withholding sales tax for the period after amendment made in statute with effect from 1st July, 2020 is not chargeable on payments made for taxable goods procured from [um-registered persons] as withholding sales tax was otherwise; required to be deducted by the companies from the payments made to registered persons who are not found active taxpayer at e-portal of the Federal Board of Revenue therefore; withholding sales tax liability for July, 2020 and August, 2020 stands Illegal, unlawful and without any jurisdiction. We simply accept this contention of appellant for the period July, 2020 onwards due to amendments made in the statute where a company has become liable to deduct withholding sales tax from the payments made to the registered persons who are not found active at e-portal of FUR and the term "un-registered persons" was deleted and replaced with the term "registered persons not found active" at computer system of the FBR. In view of this sales tax liability created on account of failure. to withhold sales tax on payments made to un-registered persons for the period July, 2020 and onwards is vacated as not warranted under law after amendment made in sales tax withholding provisions.
12. Contrarily, for the rest of tax periods as alleged in impugned show-cause notice, "paper wastes known as raddi falling at HS CODE No. 47.07 of the Customs Tariff" have admittedly been purchased at reduced rate of sales tax at 5% leviable under the Eight Schedule annexed to the Act.
On plain reading of the provisions of withholding sales tax as embodied in its rules, it appears that the appellant, being a company as defined under the Income Tax Ordinance, 2001, was liable to withhold sales tax at the rate of 5% on its gross value of supply during that very period. This is otherwise; a co-incidence that rate of sales tax on paper waste is 5% of its value of supply whereas rate of withholding sales tax is also 5% of its gross value. The appellant has asserted for that the said paper wastes have been procured from the persons falling in the cottage industry not subject to levy of sales tax as being exempted under the Sixth Schedule annexed to the Act. This connotation put forth by the appellant needs proper scrutiny and verification as to whether such paper wastes is actually purchased from the persons falling in cottage industry as defined under the Act for which the case is remanded back to the original adjudicating authority to look into the matter afresh on this account. Besides, another aspect of the case as emerged on the basis of above discussions made during the course of hearing is that the whole amount of sales tax is liable to be withheld on purchases of paper wastes which is solely meant for the purpose of taxable supplies of paper and paper board manufactured therefrom, a question needs a thorough probe into by the Inland Revenue Department as to whether appellant is entitled to claim back such sales tax paid as a whole on purchase of paper waste. During the de novo proceedings of the case, the Assessing Officer shall also determine this very aspect of the case that as to whether appellant is legally permitted to claim adjustment or credit of this whole amount of sales tax deductible on purchase of paper wastes against his contingent liabilities on account of paper and paper products manufactured therefrom. The aspect of double taxation cannot be ignored again needs thorough examination by the Assessing Officer keeping in view the deliberation as made at the bar in the case at hand. The case to the extent of withholding tax liability on paper wastes is therefore; remanded back for de novo consideration and two aspects as discussed above should be looked into afresh by the Assessing Officer obviously with due care and comfort of both the sides but after giving adequate opportunity of hearing to the appellant.
13. The appeal is disposed of in the above manner.