MR. TAUQEER ASLAM CHAIRMAN.--(1). This appeal has been filed by the taxpayer bearing Reg. No. 1710235269419 against the Sales Tax Assessment Order issued ride No. ACIR/I&I/Unit-04/Zone- II/S.T/RTO-1/34 dated 27.9.2024 passed u/s 11E of the Sales Tax Act, 1990 by the Assistant/Deputy Commissioner IR, Unit-4, Range-B, Zone-II, Regional Tax Office-1, Karachi.
2. Brief facts in accordance with the impugned order is that case of the taxpayer/registered person is an individual who derives income from the import of spices and subsequent sale of the same under the name and style of M/s Wall Trading (NADA & SUFFAH). The taxpayer filed its returns under the Sales Tax Act, 1990, claiming the status of being a "manufacturer". Subsequently, it was reported by the Director of Intelligence & Investigation (Inland Revenue) vide letter C. No. DIR/I&I- IR/Intelligence Advisory/2024/2675 dated 14-06-2024 that the registered person who is a commercial importer cum supplier, is misusing the status of a manufacturer and by doing so it has evaded a huge amount of value addition tax during the period which was payable at import stage by him. Subsequently upon the report of I&I, the Assessing Officer confronted the said discrepancies through a show cause notice dated 03.7.2024 issued u/s 11(3) wherein an amount of Rs. 316,724,413/- was confronted along with a default surcharge (to be calculated) and penalties u/s 33(5) and 33(15) respectively. In response to the show cause notices the taxpayer furnished a written reply dated 10.7.2024 which was found unsatisfactory and the sales tax demand confronted through show cause notice was confirmed Being aggrieved with the aforesaid treatment, the taxpayer preferred appeals before this forum on the grounds set forth in the Memo of Appeal.
3. The case was fixed for hearing. Mr. Naeem-ul-Haq, Advocate appeared on behalf of the appellant while the department was represented by the Mr. Bilal Jafri, DR. During the hearing of the appeal learned AR of the appellant while reiterating the grounds of appeal contended that the principles of natural justice had not been followed in the instant case as no rebuttal to the reply was issued and the order was passed after the issuance of single show cause notice and passing a non-speaking order as most of the points raised in the reply were not adjudicated upon. He stated that the show cause notice was issued u/s 11(3) of the Income Tax Ordinance, 2001 which was not in the field as of 01.7.2024 as the said provision has already been omitted vide Finance Act, 2024. He further argued that the order was passed u/s 11E, which was never confronted in the show cause notice while different amounts were confronted through show cause notice dated 03.7.2024 which put serious questions on the veracity of the impugned order and the basic document i.e. show cause notice. He stated that the learned Assessing Officer has not given judicious consideration to the very fact that the appellant falls under the category of manufacturer u/s 2(17) of the Sales Tax Act, 1990. He also stated that the learned Assessing Officer solely relied on the premature report of I&I not even bother to mention or take cognizance of the subsequent report of the RTO, Peshawar issued to RTO-I Karachi which refuted the preliminary report of I&I. He stated that the RTO Peshawar team, upon specific request of RTO-1 Karachi also conducted physical verification of the appellant's manufacturing premises and were satisfied that the appellant is involved in the manufacturing process by blending/mixing different grades of imported herbs, spices and grains as well as local raw materials and produced his own products under the brand names of "SUFFA & NADA". AR further argued that the appellant has also paid the WWF which is levied on the Industrial sector which also proves that the taxpayer is an industrial undertaking and a manufacturer. He contended that the documentary evidence provided and placed on record including registration in the register of Registrar of Trade Marks, Karachi for appellant's brand names, License certificate u/s 15 of KPFS & HFA Act, 2014 bearing no. 7372/DG/KPFSHFA/2022 issued by Khyber Pakhtunkhwa Food Safety and Halal Food Authority showing status food manufacturing unit but the same was not considered.
4. AR further contended that the status of the appellant being "Manufacturer" has already been confirmed by the concerned office of RTO-1, Karachi and this status of the appellant has already been determined at the stages of CIR (Appeals) and ATIR as provided u/s 2(17) of the Sales Tax Act, 1990 and an industrial undertaking u/s 2(29C) of the Income Tax Ordinance, 2001. The initial report of the I&I (which is the basis of the proceedings) that the appellant taxpayer is non-existent at the Karachi address is also refuted by the report of RTO-I, Karachi, thus the impugned order is also self- contradictory. AR further argued that the learned Officer in the impugned order has misinterpreted the word "manufacture" despite the settled interpretation by the highest forums and has not appreciated that the word manufacture includes a process that charging the original state of the goods to a new product. The new substance may by putting together by way of process and synthesis a new marketable material which is considered to be a new, modified, improved, and better marketable substance. According to him, the appellant is a manufacturer and an industrial undertaking, having 18 workers in his main unit i.e. Peshawar branch whereby the raw material, by a mechanical process resulting in the end product of various flavors which is a new marketable product. He also referred to Section 2(17) and Chapter X of Special Procedure for payment of Sales Tax by Importers and contended that the said provisions of law quite explicitly provides that "any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepare goods by any other manner" is a manufacturing process while clause (c) more liberally provides the definition and include in the definition of manufacture or producer, the person who owns, holds, claims or uses any patent, proprietary, or other right to goods being manufactured. Therefore, the narrow definition and interpretation given by the Assessing Officer is not the intent of the legislature and thus tenable under the law keeping in view the clear liberal definition under the Act, 1990, He stated that the Honorable Sindh High Court in its judgment reported as "2017 PTD 1497" in the case of "ORI Tech Oils Pvt. Ltd. Vs. Manager Registration, Central Registration Officer and others" has also affirmed the said view. He stated that the Honorable Supreme Court of Pakistan in its judgment reported as "2019 PTD 1342" in the case of CIR, LTO Unit-H, Karachi Vs. ORI Tech Oil Pvt. Ltd. on appeal against the above judgment of the Sindh High Court rejected appeal to the department and upheld the said judgment of the Sindh High Court and held that even if an importer (who imported goods for in-house consumption i.e. manufacturing/producing of his products) but neither had any manufacturing facility or nor had they undertaken any manufacturing themselves even then cannot denude him of the status of a "manufacturer" in the context of section 2(17) read with proviso (I) Rule 58B of the Special Procedure for payment of Sales Tax by Importers.
5. Learned AR further placed reliance on the judgment of ATIR and stated that it has already determined in ITA No. 369/PB/2017 dated 07.2.2019 by the ATIR that the process of grinding, mixing and blending is a manufacturing process and that the manufacturer changes the original import goods after mixing, blending and processing. Learned ATIR also held that the grinding process of spices and their mixing, grinding of leaves of green leaf, grinding of green cardamom, mixing and grinding of dry fruits i.e. almonds, peanuts, nutmeg, dry coconut etc for kheer grinding of food grains, cutting of paper roll and use for different purposes and the act of cutting the tin plate to size are examples of manufacturing. The department, against the order of learned ATIR however, filed a Reference before the Honorable Peshawar High Court, which was also decided against the department and the Honorable Court while the judgment reported as "PTCL 2023 CL 266" gave its clear observation that the status of "manufacturer" has already been adjudicated in favor of the respondent taxpayer and the department was barred from raising such question. Therefore, the order of the ATIR attained finality in the matter thus binding on the department. Additionally, reliance was placed to the judgment of ATIR reported as "2018 PTD 726" in the case of Messrs KHYBER TEA AND FOOD COMPANY, KATCHERY GATE, PESHAWAR Vs. Collector Customs (Appeals)
Peshawar and others. Reliance was also placed on the judgment of the ATIR cited as 2018 PTD 1188 and argued that the judgment held that mixing and blending of brent type of imported LPG and bottle into small cylinders according to the requirement of users is a manufacturing process and the unit involved in such process is an industrial undertaking. It was also argued that even otherwise Sales Tax Act of 1990 defines the "Manufacturer" or "Producer" under sub-section 17 of section 2 and includes the person in the category of "manufacturer" who engages, whether exclusively or not, in the production or manufacture of goods whether or not the raw material of which the goods are produced or manufacturer is owned by him and even include other clauses in the ambit of "manufacturer" or "producer" clause (c) of the said section i.e.; the person who owns, holds, claims or uses any patent, proprietary, or other right to goods being manufactured.
Therefore, the narrow of the Assessing Officer is not the intent of the legislature thus tenable under the law. The Honorable Sindh High Court in its judgment reported as "2017 PTD 1497" in the case of "ORI Tech Oils Pvt. Ltd. Vs. Manager Registration, Central Registration Officer and others" has also affirmed the said view which was upheld by the Honorable Supreme Court of Pakistan in its judgment reported as "2019 PTD 1342" in the case of CIR, LTO Unit-II, Karachi Vs. ORI Tech Oil Pvt.
Ltd. who upheld the judgment of the Sindh High Court and held that under the Sales Tax Act, 1990 even if an importer (who imported goods for his own consumption i.e. manufacturing/producing of his products) but neither had any manufacturing facility or nor had they undertaken any manufacturing themselves even then cannot denude him of the status of a "manufacturer" in the context of section 2(17) read with Chapter (X), Rule 58B of the Special Procedure for payment of Sales Tax by Importers notified by SRO 480(I)/2007 dated 09.6.2007.
6. On the issue of value addition tax AR contended that the learned Assessing Officer badly erred on the issue as Rule 58B(1)(i) of Chapter X of Special Procedure for Payment of Sales Tax by Importers clearly inter alia others provide that no value addition tax shall be charged on the goods as are imported by a manufacturer for in-house consumption. In the instant case as 'the appellant/registered person a "manufacturer" who imported goods/raw materials for in-house consumption, therefore, the value-added tax is not levied in the instant case. In this regard AR also placed reliance on the judgment of ATIR (HQ) Bench, Islamabad in STA No. 09/PB/2021 and STA No. 66/PB/202I dated 08.9.2021 in the case of one "M/s. Al-Khyber Tea and Food Manufacturing Company, Peshawar" and stated that in sales tax appeal of the said company learned ATIR following the judgment of Apex Court reported as "2019 SCMR 875" held that there is no ambiguity that the registered person possess all the attributes of a "manufacturer" as prescribed through sub clause (c) of clause 17 of section 2 of the Act, 1990, and thus clearly falls within the definition of the word "manufacturer" as defined in the Act ibid. The ATIR in the said judgment further held that the registered person imported goods for its in house consumption' inasmuch as the same are blended into form spices for sale/marketing by the registered person under their brand name as a finished product, which is available in the wholesale as well as in the retail market under different packing i.e. "clove powder", "cardamom powder", "mix dry fruit powder", "black pepper powder" etc and as their own brand (with printed price) and that the registered person is undoubtedly and fully entitled to the exemption from payment of VAT. Learned AR also argued that imposition of penalty u/s 33(5) while the appellant paid dues taxes with the sales tax return and no contravention of the provision of the Sales Tax Act, 1990 involved in the matter. Moreover, the penalty imposed u/s 33(15) of the Act, 1990 is to be imposed if, a person obstructs the authorized officer in the performance of his official duties while there is no such matter involved. As there is no mens-rea established therefore imposition of penalty is illegal as per the ratio settled by the Apex Court. AR concluded that the impugned order warrants vacation being illegal, against the facts and circumstances of the case.
7. Conversely, learned DR opposed the argument of the AR and stated that the appellant do not qualify a manufacturer as manufacturing generally means of bringing into existence a new substance and not merely to produce some change in a substance and that in the manufacturing process there is must be a transformation and a new and different article must emerge having a distinctive name, character or use. In the instant case, the appellant does not qualify for the exemption available from VAT as provided under Chapter X, Rule 58B of the Special Procedure for Payment of Sales Tax by Importers. Hence, involved in tax fraud and evaded sales tax willfully, thus the imposition of sales tax and penalties are justified along with a default surcharge.
8. We have given due consideration and analyzed the arguments put forth by both sides. The matter in dispute relates to the imposition of Value Added Tax of Rs. 316,724,413/- along with default surcharge and penalties on the allegation of misusing the status of a 'manufacturer' by the appellant. Before proceeding further, it would be imperative to reproduce the relevant provisions i.e. sub-section (16) and (17) of Section 2 of the Sales Tax Act, 1990.
"(16) manufacture" or "produce" includes--
(a) any process in which an article singly or in combination with other articles, materials, or components, is either converted into another distinct article or product or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process incidental or ancillary to the completion of a manufactured product;
(b) process of printing, publishing, lithography and engraving; and
(c) process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner;
(17) "manufactured" or "producer" means a person who engages, whether exclusively or not, in the production or manufacture of goods whether or not the raw material of which the goods are produced or manufactured are owned by him; and shall include--
(a) a person who by any process or operation assembles, mixes, cuts, dilutes, bottles, packages, repackages or prepares goods by any other manner;
(b) an assignee or trustee in bankruptcy, liquidator, executor, or curator or any manufacturer or producer and any person who disposes of his assets in any fiduciary capacity; and
(c) any person, firm or company which owns, holds, claims or uses any patent, proprietary, or other right to goods being manufactured, whether in his or its name, or on his or its behalf as the case may be, whether or not such person, firm or company sells, distributes, consigns or otherwise disposes of the goods [Provided that for the purpose of refund under this Act, only such shall be treated as manufacturer-cum-exporter who owns or has his own manufacturing facility to manufacture or produce the goods exported or to be exported]"
Contention of the appellant is that he is a manufacturer/producer' as provided u/s 2(17) of the Act, 1990 and is involved in import of goods for in-house consumption through a mechanical process resulting in the end product of various flavors which is considered as a new marketable product therefore VAT is not applicable on the registered person as provided under Chapter X, Rule 58B of the Special Procedure for payment of Sales Tax by Importers. The Assessing Officer however, rejected the contention of the registered person and asserted through impugned order that manufacturing generally means of bringing into existence a new substance and not merely to produce some change in a substance and because in the manufacturing process, there must be a transformation and a new and different article must emerge having a distinctive name, character or use.
9. The contentions of both sides have been examined. The Sales Tax Act, 1990 Clause (c) of section 2(16) explicitly provides that the process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner is a manufacturing process while clause (c) of section 2(17) also include in the definition of manufacture or producer, the person who owns, holds, claims or uses any patent, proprietary, or other right to goods being manufactured. The Honorable Sindh High Court in its judgment reported as "2017 PTD 1497" in the case of "ORI Tech Oils Pvt. Ltd. Vs. Manager Registration, Central Registration Officer and others" interpreted the issue which was subsequently confirmed by the Honorable Supreme Court of Pakistan in its judgment 'reported as "2019 PTD 1342" in the case of CIR, LTO Unit-II, Karachi Vs. ORI Tech Oil Pvt. Ltd. Relevant part of the judgment of the Honorable Supreme Court is reproduced below:- "... ...
8. A plain reading of the above definition clearly reveals that the Act give much broader meaning to the word "manufacturer" by including those who owns, holds, claims, or uses any patent, proprietary or other rights to the goods being manufactured whether in their name or on their behalf and thus broadens the canvass to portray the above category of persons/entities within the meaning of the word "manufacturer".
9. Admittedly the raw material used for preparing lubricants including the base oil and additives, are imported and owned by the respondent company, the blending thereof into lubricants is done by the vendor as per the specification of the respondent company, for which blending the respondent company pays to the vendor an agreed amount of Rs. 7 per litre. The material having been blended into lubricant is packed by the vendor in the packaging provided by the respondent company, and the product so packed is delivered to the respondent company, for them to market it as their product and under their brand name. The imported raw material as is evident from the foregoing is delivered to the vendor in his capacity as a bailee only, for them to blend it for the respondent company, where after he returns the same to the respondent company blended into lubricants at a cost paid by the respondent company. The delivery of the subject goods to the vendor as above, cannot by any stretch of imagination be termed as a taxable supply. At no point in time, during the entire process any dispossession of the imported goods is affected from the respondent company to, or in favour of the vender and at no time during the course of such transaction the respondent-company loses ownership of the imported goods, or the product made thereof nor does the vendor acquire any proprietary rights therein as such.
10. It is also obvious that the manufacturing/blending of the subject imported material into lubricants is carried out under the orders of for and on behalf of the respondent company, and in their name. It is also not disputed that the brand name, 'ORIO Tech', appended to the packaging and attributed to the lubricants under which name the lubricants are sold, and marketed, is registered in the name of and is owned by the respondent company. It hardly needs to be reiterated that throughout the process the respondent company, holds and possesses the proprietary right to the subject imported goods, and the product made thereof and thus there remains absolutely no ambiguity that the respondent company possess all the attributes of a 'manufacturer' as prescribed through sub-clause (c) of clause 17 of section 2 of the Act., and thus clearly falls within the definition of the word "manufacturer" as defined thereby. Furthermore, the imported goods as noted hereinabove are used by the respondent company for their 'in-house consumption', inasmuch as same are blended into lubricants for sale/marketing by the respondent company under their brand name and as their product. The respondent company is therefore undoubtedly and fully entitled to the exemption from payment of VAT provided for under rule 58B of the Rules, as rightly held by the learned Division Bench of the High Court through the impugned judgment, which judgment is upheld. Leave to appeal is therefore refused. The petition stands dismissed."
The Apex court through the judgment quoted supra has settle the ratio that blending and packaging for further supply by a person under their brand name in respect of imported raw material for in-house consumption cannot be stretched as a "taxable supply" tender the Sales Tax Act, 1990. The Honorable Court further held that the respondent company at no time during such transaction loses ownership of the imported goods, or the product made thereof, nor does the vendor acquire any proprietary rights therein as such thus falls within the definition of the word "manufacturer" as defined thereby. Therefore, VAT is not applicable under Chapter X, Rule 58B of the Special Procedure for payment of Sales Tax by Importers notified by SRO 480(I)/2007 dated 09.6.2007.
10. In the matter under reference the appellant filed its returns and by claiming the status of "manufacturer" and "an industrial undertaking" declared the tax deducted at the import stage as "adjustable tax" and subsequently filed refund applications. The Assessing Officer, however, upon the "Physical Verification Report" signed by Director I&I IR, Karachi, issued vide No. DIR/I&I/Intelligence Advisory/2024/2675 dated 14.6.2024 initiated proceedings under newly inserted section 11E of the Sales Tax Act, 1990. First, it would be imperative to discuss the physical verification report which is the basis for proceedings. The said letter dated 14.6.2024 addressed to Chief Commissioner IR, RTO-I, Karachi provides that physical verification was conducted of the following declared address of the appellant taxpayer:--
(i) "3rd floor, Sb no. 15, St 10, sector 6-g, Mehran Town, Korangi Town.
(ii) Office no. 5/19, Wazir Manzil, Ali Akber street, Saddar Town, Karachi.
As per the report no business activity is carried on the first address while the second address was untraceable and the second address is related to wholesale market and manufacturing activity is not possible there. The said correspondence dated 14.6.2024 further provides that the items imported by the appellant/taxpayer were ready to use and apparently no further processing was needed to be done and that the tax deducted at the import stage of a commercial importer is required to be considered as "minimum tax" in terms of section 148(7) of the Income Tax Ordinance, 2001 and following actions were proposed to the CCIR:- I. All pending Income Tax Refunds may be examined in the light of the facts narrated above, and II. Recovery proceedings may be initiated to recover value addition tax evaded at the import stage.
AR of the appellant challenged and refuted the I&I report and stated the RTO authorities at their own conducted physical verification of the business premises of the appellant at Karachi as well as Peshawar which has been duly verified but the impugned order is silent on such physical verification. On this learned DR was asked to rebut the same and was asked to respond if any such report existed which is mentioned by the AR in the written reply as well as in his arguments. On this, the DR produced a copy of the letter dated 09.7.2024 duly signed by the CIR (Zone-II), RTO-1, Karachi which was addressed to the concerned CCIR. As per letter after receipt of the initial Physical Verification Report from I&I dated 14.6.2024, the authorities of RTO-I, in the light of the I&I report also conducted physical verification to determine the taxpayer's status as to whether the appellant is solely an importer and supplier or also engaged in manufacturing activities at the following premises in Karachi as well as Peshawar:-
(i) 3rd floor, Sb no. 15, St 10, sector 6-g, Mehran Town, Korangi Town.
(ii) Malak Maqbool Market, Mirch Mandi, Charsadda road, Peshawar,
11. From a bare perusal of the letter dated 09.7.2024 it was revealed that the CIR, Zone-II, RTO-1, Karachi submitted its report with his findings, to the CCIR, RTO-1, Karachi which was accompanied by copies of physical verification reports of RTO-1, Karachi and RTO, Peshawar. Para 3 and 4 of the said letter dated 09.7.2024 is reproduced below:- Quote " ... ...
3. The physical verification, performed at the Karachi unit, revealed that the facility is engaged in manufacturing processes and the manufacturing operations at Karachi unit are currently in the development stage. The detailed physical verification report is attached for reference.
4. Secondly, in response to this office letter No. CIR/ZONE-11/RTO-VI&I-KHI/2023-24/4333, dated 29- 06-2024 for conducting physical verification of the said unit located in Peshawar, this office received a comprehensive report by the office of the Chief Commissioner Inland Revenue, Regional Tax Office, Peshawar vide letter bearing No. CCIR.RTO(HQ)/Misc:/CIR Pesh/2023/10 dated 04.07.2024 by this office on 08.07.2023. In this detailed report the Commissioner-IR, RTO Peshawar confirms that a significant portion of the taxpayer's manufacturing operation is conducted at the unit located in Peshawar. It is apparent that I&I's Karachi observation regarding non-existence of manufacturing unit(s) appear factually correct."
Unquote It has been explicit from the above letter dated 09.7.2024 and the 'combined reading of physical verification reports conducted by the concerned Regional Tax Offices that the appellant is also involved in the process of manufacturing and that a significant/major portion of the manufacturing operation is conducted at the Peshawar premises. The impugned order dated 27.9.2024 has not mentioned RTO, Peshawar report from which it transpired that the Assessing Officer was predetermined to penalize the appellant and impose tax despite the fact that a combined reading of verification reports of RTO, Peshawar as well as RTO-1, Karachi refuted the earlier report of I&I regarding the claim of the appellant being "manufacturer" as provided u/s 2(17) of the Sales Tax Act, 1990. After examination of the record including reports annexed with the CIR letter dated 09.7.2024 and taking into consideration the arguments it has been established that the appellant during the impugning period imported certain spices and other relevant in bulk consignments which were cleaned, crushed, grinded, mixed, blended, packed and sold under the brand names of "Nada" and "Suffa" as a finished product, which is available in the wholesale as well as retail market under different packing i.e. "clove powder", "cardamom powder", "mix dry fruit powder", "black pepper powder" etc as a finished product to be sold in retail market under own brand at printed price. It is settled principle of law that if the foundation of any order or action is illegal then the whole superstructure built thereupon cannot be sustained. When the law specifies a particular manner and procedure then it is obligatory for the functionary of the state to adhere to the same and comply with it in all respects and any negligence, failure, or omission to do so invalidate the proceedings on account of which whole superstructure raised on such defective foundation automatically crumbles down. In the instant case, the basis/ foundation of the case is the initial report of I&I which is refuted by the subsequent "Physical Verification Reports" of the department duly verified by the concerned Commissioner IR therefore, we do not feel hesitation to hold that base of the proceedings are illegal given the ratio settled by the higher courts thus superstructure raised on such defective foundation is not sustainable under the law.
12. Now the question to be determined before this forum is "whether the process of grinding, mixing, blending, and packing to be sold under brand names, can be termed as "manufacturing process"?
The appellant claims that their product undergoes a manufacturing process to reach the final products and quoted parallel judgments to support his claim.
13. We have in this regard perused the judgment reported as "2000 PTD 874" dated 12.11.1999 in ITA No. 66KB to 70/KB, wherein after a comprehensive debate, the Tribunal has answered this very question and decided the issue in favor of the taxpayer. Furthermore, the ATIR in ITA No.369/PB/2017 dated 7.2.2019 in the case of Al Khyber Tea and Food Co, Peshawar vs the CIR, RTO, Peshawar the ATIR decided the similar question as to whether or not the mixing, blending, and coloring is a manufacturing process and it was eventually held that mixing and blending is a manufacturing process. It would be imperative to quote here that the department filed a Reference against the order of ATIR in ITA No. 369/PB/2017 dated 7.2.2019 and the Honorable Peshawar High Court in its reported judgment (PTCL 2023 CL. 266) answering the departmental reference in "negative" and deciding against the department and held that 'Where the issue pertains to the declaration of respondent company as Manufacturer" which has already been adjudicated and decided in favour of respondent company, the petitioner is burred from raising this legal question again and again".
14. As far as the issue adjudged by the Assessing Officer in the matter under reference. We are also fortified by the judgment of the Honorable Supreme Court of Pakistan "2019 PTD 1342'. quoted in the preceding para where while determining the status of a "manufacturer", the ratio has been settled and held that the sales tax act treats a person as "manufacturer or producer" even if had no manufacturing facility or nor had they undertaken any manufacturing themselves even and such even cannot denude him of the status of a "manufacturer" in the context of section 2(17) read with Chapter X, Rule 58B of the Special Procedure for payment of Sales Tax by Importers. In this instant case, it has already been establishment by the Physical Inquiry Report of the RTO Peshawar and duly confirmed by the CIR (Zone-II), RTO Karachi that the appellant is involved in the process of "manufacturing".
15. In view of the foregoing and the ratio settled by the ATIR and in line with the judgment of the Honorable Apex Court we second that the process of mixing, blending, and packing to be sold under band name is a manufacturing process, and the appellant under reference is entitled the status of "manufacturer" u/s 2(17) of the Sales Tax Act, 1990 read with Chapter (X), Rule 58B of the Special Procedure for payment of Sales Tax by Importers notified by SRO 480(I)/2007 dated 09.6.2007, therefore, value added tax was not applicable on the appellant during the impugning period. Therefore, the sales tax imposed and default surcharge is deleted. As far as the matter of imposition of penalties is concerned, the essential element of "mens-rea" has to be established against a person. In the instant case, the Assessing Officer also erred while alleging the registered person involved in tax fraud u/s 2(37) of the Act, 1990 as the Honorable Karachi High Court in the case reported as 2004 PTD 868 held that the burden of proof to establish that provision of section 2(37) are attracted in the case of a person lie on the shoulders of the department which is also affirmed by the Honorable Apex Court. The respondent department is primarily responsible to establish that a taxpayer, knowingly, dishonestly, or fraudulently and without any factual excuse has done any act or has caused to be done or has omitted to take any action or has caused the omission to take any action in contravention of duties or obligations imposed under the Sales Tax Act, 1990 or Rules or instructions issued there under. The drastic action of tax fraud taken against the appellant is based on roving inquiries as well as presumptions which is unwarranted as per law. The Assessing Officer in the instant case imposed penalty u/s 33(15) which is to be imposed on a person who obstructs the authorized officer in performance of duties while there is no case of obstructing of performance of duties observed in the whole proceedings. However, correspondent section of penalty of tax fraud is 33(13) of the Act, 1990. As the initial onus of proving of guilty intention was on the department which the department while in the instant case there is no guilty intention on the part of the taxpayer, for committing, causing to commit or attempts to commit the tax fraud or abets or connives in commissioning of tax fraud u/s 2(37) of the Act, 1990 Act thus the imposition of penalty is also deleted. The Assessing Officer imposed penalty u/s 33(5) of the Act, 1990 for alleged failure to deposit the amount of tax due however, as there found no sales tax due against the appellant therefore, the said penalty is also deleted being unwarranted.
16. Based on the above discussion, we vacate the order of the Assessing Officer dated 27.9.2024.
Consequently, the appeal under consideration stands accepted with the deletion of sales tax as well as the consequential proceedings which are also vacated.