SYED ARSHAD ALI, J. This consolidated judgment is aimed to decide the instant Sales Tax Reference as well as connected STR No. 27-P/2023 as essentially adjudication of common questions of law are involved in both the Reference.
2. Messrs Gadoon Textile Mills Ltd. ("Company") has filed Sales Tax Reference No.26-P/2023 under section 47 of the Sales Tax Act, 1990 ("Act") against the following findings of the Appellate Tribunal Inland Revenue, Peshawar Bench ("Tribunal") dated 29.11.2022: "A refund claim of Rs. 15,402/- against invoices of M/s Yasir Industries was rejected due to the objection that the said amount of refund had been claimed on purchases of packing material which was not admissible under section 8(1) (b) of the Act read with SRO 491(I)/2016 dated 30.06.2016. The appellant registered person has contended that it had purchased Packing Materials-cartons-from the above mentioned suppliers which were used for packing of yarn for export. According to the appellant, these purchases were integral part of the unit and used in the taxable activity, hence, the appellant was entitled to input tax on the same. With regard to the above contention, it is worth noting that certain amendments were made in SRO 1125(I)/2011 through SRO 491(I)/2016 dated 30.06.2016 wherein it has been provided specifically, among others, vide the substituted condition (x) that no input tax credit or refund shall be admissible on the packing material of all types. The appellant's claim has thus been found to be contrary to the said specific provisions and, accordingly, the finding of the L/CIR(A) in the matter to the extent of rejection of refund claim of Rs.15,402/- is hereby confirmed".
Similarly, the Company has also filed has Sales Tax Reference No.27-P/2023 under section 47 of the Sales Tax Act, 1990 ("Act") against the following findings of the Appellate Tribunal Inland Revenue, Peshawar Bench ("Tribunal") dated 9.01.2023:- "Similarly, the writ petitions filed by the registered persons on the said issue were also dismissed by the Hon'ble Lahore High Court, Lahore in the case titled M/s. Kohinoor Textile Mills Limited v.
Federation of Pakistan and other, bearing W.P. No.8046 of 2017 vide order dated 02.05.2018.
Therefore, by respectfully following the above judgments, we hold that the claim of input tax against the packing material has rightly been disallowed by the department. Accordingly, the impugned order passed by the learned CIR (A) is maintained to such an extent. As a result, the appeal of the appellant is dismissed".
3. Brief facts of the case are that through Notification dated 30.06.2016 (SRO 491(I)/2016), the Federal Government has made some amendment in notification dated 31.12.2011 (SRO 1125(I)/2011), allowing input adjustment to the registered persons relating to their zero rated supply, in the following terms:-
(x) a registered person who has consumed inputs acquired on payment of sales tax, shall be entitled to input tax adjustment, subject to the relevant provisions of the Sales Tax Act, 1990 and Rules made thereunder: Provided that no input tax credit or refund shall be admissible on the packing material of all sorts.
Provided further that the post refund audit and scrutiny shall be conducted and finalized in the manner as provided in the Sales Tax Rules, 2006".
The grievance of the present petitioner relates to the 1st proviso which bars input tax credit or refund on packing material purchased by a registered person whose taxable supplies are zero rated.
The aforesaid proviso was deleted through Notification dated 21.06.2018 (SRO 777(I)/2018), however, at the relevant time it was applicable to the case of the petitioner.
4. The essential issue for determination before this Court is whether the petitioner-Company is entitled to adjustment of input tax, which it has paid on packing material and the said packing material is used for the purpose of taxable supplies made by it in course of his business activities?
5. In order to effectively answer the aforesaid question, we deem it appropriate to examine and refer to the relevant provisions of the Act.
Section 2 (14) "input Tax", in relation to a registered person, means-
(a) tax levied under this Act on supply of goods to the person;
(b) tax levied under this Act on the import of goods by the person;
(c) in relation to goods or services required by the person, tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the goods, of the rendering or providing of the services;
(d) Provincial Sales Tax levied on services rendered or provided to the person; and
(e) levied under the Sales Tax Act, 1990 as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by the person; Section 2 (20) "output tax", in relation to any registered person, means--
(a) tax levied under this Act on a supply of goods, made by the person;
(b) tax levied under the Federal Excise Act, 2005 in sales tax mode as a duty of excise on the manufacture or production of the goods or the rendering or providing of the services, by the person;
(c) sales tax levied on the services rendered or provided by the person under Islamabad Capital Territory (Tax on Services) Ordinance, 2001 (CLII of 2001); Section 2 (41) "taxable supply" means a supply of taxable goods made in Pakistan by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4; Section 3 Scope of Tax.- (1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of seventeen percent of the value of-
(a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and
(b) goods imported into Pakistan, irrespective of their final destination in territories of Pakistan.
Section 7 Determination Of tax liability,-- (1) Subject to the provisions of sections 8 and 8B, for the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall subject to the provisions of section 73, be entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made, or to be made by him from the output tax excluding the amount of further tax under subsection (IA) of section 3, that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9; Provided that that where a registered person did not deduct input tax within the relevant period, he may claim such tax in the return for any of the six succeeding tax periods.
(2) A registered person shall not be entitled to deduct input tax from output tax unless, - (i) in case of a claim for input tax in respect of a taxable supply made, he holds a tax invoice in his name and bearing his registration number in respect of such supply, or in case of supply of electricity or gas, a bill bearing his registration number and the address where the connection is installed: Provided that from the date to be notified by the Board in this respect, in addition to above, if the supplier has not declared such supply in his return or he has not paid amount of tax due as indicated in his return; Section 8 Tax credit not allowed.- (I) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input paid on-
(a) the goods or services used or to be used for any purpose other than for taxable supplies made or to be made by him;
(b) any other goods or services which the Federal Government may, by a notification in the official Gazette specify;
6. The perusal of the aforesaid provisions of law would clearly show that section 3 is a charging section, whereas section 7 of the Act allows input adjustment to a registered person for the purpose of determining tax liability in respect of taxable supplies, when he has paid the said input tax for the purpose of taxable supplies made or to be made by him from the output tax i.e. due from him. The scope of section 7 of the Act was elaborately explained by the apex Court in the cases of Sheikhoo Sugar Mills Ltd. and Messrs Attock Cement Pakistan Limited, Karachi[1]. In the case of Sheikhoo Sugar Mills Ltd., the apex Court has observed.
"We have examined section 7 of the Act carefully which appears to be beneficial provision of law in nature providing a facility to a registered person to adjust input tax at the time of making payment of output sales tax".
Similarly, the scope of section 7 was elaborately discussed by the apex Court in the case of Messrs Attock Cement Pakistan Limited, Karachi (supra), in the following manner:- Adjustment of 'Input Tax'
10. In order to cater for and facilitate the value addition of goods made during the supply chain of production, and to case the burden of tax on the supplier, the legislature has introduced in the Sales Tax Act, the concept of 'input tax" and 'output tax'2, and then provided for the adjustment of the former at the time of paying the latter. 'Input tax' being the tax paid by the person receiving the supply of goods, while 'output tax' being the tax payable at the time of making the supply of the value added goods. To facilitate the supplier, the legislature has provided a facility for the adjustment of the 'input tax' from the 'output tax' payable at the time of making the supply of the value-added goods. Thus, the 'input tax' paid by one supplier on receiving the goods would be the 'output tax' of the other, who is supplying the said goods, and the supplier on receiving the price of the goods supplied would after deducting the already paid 'input tax' from the 'output tax', deposit the balance in the treasury. This process would continue at each successive stage of the supply chain, until the final goods is purchased by the final consumer, who would be finally burdened with the entire incidence of sales tax.
7. Section 8 of the Act starts from non-obstante clause and put a clog upon the input adjustment in certain cases, where the goods used or to be used for any purpose other than for taxable supplies made or to be made by him. Section 8 of the Act does not per se create any separate class of goods disentitling a registered person from claiming or deducting input tax. It further clarifies the mandate of section 7(1) of the Act, which allows the input adjustment on such goods which are used for the purpose of taxable supplies. Similarly, under section 8(b) of the Act, the Federal Government has been given the power to notify any other goods in the official Gazette against which input adjustment shall not be allowed. This does not, mean that the Federal Government has any jurisdiction to create and insert a new class in the regime of the Sales Tax Act, who shall be disentitled to input adjustment which is otherwise allowable to a registered person under a statutory dispensation i.e. section 7 of the Act. This position has been very well explained by the Hon'ble Karachi High Court in the case of Ghandhara Nissan Diesel Ltd.[2], reads as under: - "We further find that the legislature has itself given entitlement to a class of goods in respect whereof input tax can be reclaimed or deducted and has further specified a class of goods, the payment of tax whereon, shall not be allowed to be reclaimed or deducted from the output tax.
The legislature has not empowered the Federal Government to create any other class of goods in general terms excluding the same from the purview of reclaim or deduction of input tax. It has merely empowered the Federal Government to specify, meaning thereby, to mention particularly or determine the specific goods which otherwise entitle the registered person for re-claiming or deducting input tax, to exclude from such, concession. Thus, creation of new class of goods in general terms disentitling the registered person from re-claiming or deducting input tax paid on such goods is not in consonance with the substantive provision contained in section 8(1)(b) of the Sales Tax Act. It is manifestly beyond the authority, delegated to the Federal Government by the legislature".
The apex Court in the case of Sheikh Spinning Mills Limited[3] has observed that:- "It seems to be well-settled proposition of law that the Central Board of Revenue, or for that matter even the Federal Government, cannot control or curtail judicial adjudication power vested in the forums provided under the relevant law by giving a particular interpretation to a particular provision of the relevant law or by issuing notification/S.R.O. for that purpose".
8. Therefore, once a registered person establishes that the goods in question on which input tax has been paid were used or to be used for the purpose of manufacture or production of taxable goods or for taxable supplies made or to be made by him/it then subject to the terms of section 8 of the Act, he/it becomes entitled to the deduction of the said input tax paid by it from the output tax due from it in respect of the particular tax period.[4] It was further observed by the apex Court that when the department denies deduction of input tax paid on goods, which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied, then the registered person would be at liberty to agitate the controversy and issue shall be considered with reference to the substantive provisions of the Act and if any conflict was found in the SRO affecting any right of a registered person provided by the Act, the substantive provision of the Act, will prevail and the restrictions contained in any SRO or other subordinate legislation shall be ignored.[5]
9. Since in the present case, the input adjustment against packing material was disallowed for the only reason that the SRO 1125(I)/2011 bars the input adjustment, which was issued by the Federal Government under section 8(1B) of the Act, therefore, while applying the law laid down by the apex Court in the case of Sheikh Spinning Mills Limited (supra), the said SRO has to yield before the substantive provision of section 7 of the Act which allows input adjustment to a registered person against the goods which are or would be used for the taxable activities. Admittedly, the packing material purchased by the petitioner-company which are used for the purpose of taxable supplies, therefore, the petitioner is entitled to adjust input tax against his output tax. The question of law is answered in the aforesaid manner.
10. Both the References stand disposed of accordingly. Copy of this judgment be sent to the worthy Tribunal in terms of Section 47(5) of the Act.
[1]Sheikhoo Sugar Mills Ltd. v. Government of Pakistan and another (2001 SCMR 1376).
The Commissioner Intend Revenue, Karachi v. Messrs Attock Cement Pakistan Limited, Karachi (2023 SCMR 279).
2. Ghandhara Nissan Diesel Ltd., through Sr. General Management Finance, Karachi v.
Collector, Large Tax Payers Unit, Government of Pakistan, Karachi and 2 others (2006 PTD 2066),
3. The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others (1999 SCMR 1442)
4. Messrs Sheikh Spinning Limited v. Federation of Pakistan through Ministry of Finance, Federal Secretariat Islamabad through Secretary and 2 others (2002 PTD 2959)
[5]The Central Board of Revenue, Islamabad and others v. Sheikh Spinning Mills Limited, Lahore and others (1999 SCMR 1442). Pakistan through Secretary Finance, Islamabad 5 others v. Aryan Petro Chemical Industries (Pvt.) Ltd., Peshawar and others (2003 SCMR 370)
National Electric Power Regulatory Authority v. Faisalabad Electric Supply Company Limited (2016 SCMR 550) L.T-Col. Nawabzada Muhammad Amir Khan v. The Controller of Estate Duty and others (PLD 1961 Supreme Court 119).