ORDER: DR. SHAH KHAN MEMBER. (1). The instant appeal was filed before and pending with the L/CIR(Appeals) and has been transferred by the L/CIR(Appeals) on 20.08.2024 to this forum in terms of sub-section (4) of the newly inserted section 43A of the Sale Tax Act, 1990 (hereinafter referred to as the "Act") inserted by the Tax Laws (Amendment) Act, 2024 for adjudication by this forum under sub-section (5) of section 43A read with sections 46 of the Act.
2. Briefly stated facts of the case are that, in the instant case, Deputy Commissioner-IR issued show cause notice bearing C. No. ST/150 dated 10.11.2023 to the appellant Peshawar Electric Supply Company ("The PESCO") asking to explain as to why the principal amount of Rs. 1.597 Billion alongwith default surcharge & penalty should not be recovered under the relevant provisions of the Act. The sole allegation made against the appellant/PESCO is that during examination of Annexure-C of the sales tax returns for the tax period July, 2021 to June, 2022, PESCO has declared zero rated supplies of electricity worth Rs. 12,060,834,203/- out of which Rs. 10,997,321,589/- were found paid by the Government of Pakistan. Since the amount paid by the Government of Pakistan as subsidy is not subject to sales tax under Section 2(46)(i) of the Act, therefore PESCO was not justified to adjust input tax amounting to Rs. 1,597,901,427/- in the respective tax periods under section 8(2) of the Act. The appellant filed reply to the above mentioned Show Cause Notice wherein charges levelled in the Show Cause Notice were denied. After the proceedings, the Deputy Commissioner I.R ride Assessm ent Order No. 11/2024 dated 28.02.2024 ordered for recovery of sales tax amounting to Rs.1.597 Billion alongwith default surcharge and penalty. Aggrieved thereof, the appellant filed an appeal before the learned CIR(A) and transferred the appeal to this forum for further adjudication as the value of assessment involved in this case is more than 10 million rupees.
3. This appeal was fixed for hearing on 12.11.2024. On due date, Mr. Hussain Ahmad Sherazi, Mr. Mouzzam Ali Butt, Advocate/AR appeared on behalf of the appellant registered person and argued his case, while Mr. Ishfaq Ahmed, DR appeared to represent the Tax Department and defended the order passed by DCIR, Corporate Zone, RTO, Peshawar.
4. The learned A.R argued that the payment of subsidy by the Government of Pakistan does not render the electricity as a non-taxable supply. He maintains that under sections 2(39), 2(41), 2(11) read with section 3 of the Act, the supply of electricity to various consumers remains a taxable supply and the amount received as subsidy does not convert it as non-taxable. Thus the law allows the adjustment of input tax relating to taxable supplies and disallows it in the case of non-taxable supplies. The learned A.R stressed that there is no dispute that supply of electricity cannot be termed as non-taxable goods simply due to partial financing of the electricity bills relating to the impoverished society and this forum may take judicial notice of the fact that grant of subsidy is a welfare step to ameliorate the financial predicament of the impecunious community by the government. Reliance was placed on PTCL 2006 CL. 389 & 2024 PTD 1021.
5. The learned A.R has further pleaded that the Federal Government has granted CONCESSION to the Electric Power Distribution Companies against the amount of subsidy and it is settled principle of law that mere concession in the charge does not make supply as non-taxable/exempt supply.
Thus, section 8(2) of the Act is not attracted in this case. He strenuously stated that the present controversy has already been settled by the Learned Tribunal in another DISCO'S case (Faisalabad Electric Supply Company) in its judgment reported as 2014 PTD (Trib.) 1629. However, this judgment has neither been discussed nor distinguished by the Assessing Officer in his order. Further reliance was placed on the judgments reported as 2023 PTD (Trib.) 344 & 2018 PTD 2170 wherein it has been expounded that the decisions of the Appellate Tribunal Inland Revenue (the "ATIR") are binding on the RTO/Tax authorities and they have to follow the same.
4. (sic) The learned A.R submitted that Rule 24 of the Sales Tax Rules, 2006 (the "Rules, 2006") shall apply to those registered persons who make taxable and exempt supplies simultaneously. The term subsidy has neither been declared as exempt supply nor notified under section 13 of the Act during July 2021 to June 2022 (Tax period involved in this case) by the Federal Government. He reiterated that the concession of sales tax relating to subsidy does not mean that these supplies are exempt from the sales tax and mere adding the amount of subsidy under the definition of value of supply does not debar the taxpayer to claim its legal input tax.
5. (sic) The learned A.R has also raised the preliminary objections that the issuance of show cause notice without any audit proceedings makes Section 25(5) of the Act, 1990 redundant. In this regard, reliance was placed on 2017 PTD 1372; 2005 PTD 1537 & 2013 PTD 372. The learned A.R added that the Inland Revenue Department cannot conduct audit without strictly following the relevant provisions of the Act. He explained that the tax regulator monitor self-assessment, system through neutral and impartial tool of audit under section 25 or 72B of the Act. There is no other mechanism under the Act to lift the veil of self-assessment protecting the monthly tax return filed by the taxpayer. He clarified that the appellant has been subjected to numerous audits during the year which is sheer violation of Section 25(2) of the Act. Reliance in this regard was placed on a number of cases e.g. 2018 PTD 1444=PTCL 2018 CL. 678=2018 SCMR 1328; PTCL 2014 CL 710; PTCL 2014 CL. 726; PTCL 2021 CL. 765 = 2021 PTD (Trip.) 2050; 2020 PTD (Trib.) 666; 2020 PTD (Trib.) 585; STA No. 833/LB/2018; 2019 PTD 1030; 2015 PTD (Trib.) 1050; 2013 PTD (Trib.) 954; 2019 PTD (Trib.) 1108; 2019 PTD (Trib.) 939; PTCL 2020 CL. 6 = 2020 PID 297; STA No. 1506/LB/2014; PTCL 2014 CL. 726; STA No. 489/LB/2017; STA No. 490/LB/2017 2019 PTD 1780.
6. The learned A.R urged that the Impugned show cause notice and the assessment order are without Jurisdiction under sections 11(2) and Section 30 read with Section 2(18) of the Act. Lastly, the learned A.R pointed out that the allegation in the show cause notice was never raised in the previous show cause notice C. No. ST/ZR/645 dated 11-05-2023 for the same tax period 2021-2022.
Hence, the Assessing Officer now lacked power to re-open, re-adjudicate and review proceedings in the garb of second show cause notice under section 11 of the Act. In this regard, reliance was placed on 2020 PTD (Trib.) 907.
On the basis of above arguments, the learned AR has requested to allow the appeal.
7. On the contrary, the learned D.R submits that the appellant has illegally adjusted the input tax without following the proper procedure prescribed under section 66 of the Act. He emphasised on the unreported judgment passed in STR No. 15-P of 2021 dated 23-11-2023 by the Peshawar High Court. In addition, the learned D.R has contended that section 8(2) of the Act has mentioned the word non-taxable which simply means that part of supply on which output tax has not been paid.
He stressed that the input tax adjustment is only available to the taxpayer when he is liable to pay sales tax on his supplies.
8. We have perused the impugned Assessment order, the case law referred and the available record of the case. The essential issue for determination before this Court is whether the petitioner- A Company is entitled to adjustment of input tax paid at the time of purchase of electricity from the Central Power Purchase Agency (the "CPPA") to the extent of subsidy granted by the Federal Government as a welfare measure?
9. In order to effectively answer the aforesaid question, we deem it appropriate to examine and refer to the relevant provisions of the Act. Section 8(2) of the Act provides that a registered person shall not be liable to reclaim or deduct input tax paid on various categories of the goods enumerated therein. Section 8(2) of the Act provides:-- "Section 8(2):--if a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board"
(Emphasis added).
The scope of the sales tax for goods made in Pakistan is elaborated in section 3 of the Act and it connotes:--
3. Scope of tax.--(l) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of eighteen per cent of value of--
(a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; (Emphasis supplied)
The term non-taxable goods has not been defined in the Sales Tax Act, 1990 while the terms "Goods", "Taxable Goods" and "Taxable Supply" are defined in Sections 2(12), 2(39) & (41) of the Act.
The same are as follows:-- S.2(12):--"Goods" include production, transmission and distribution of electricity and every kind of immovable property other than actionable claims, money, stocks, shares and securities.
(It is clear that subsidy in the form of money stands specifically excluded from the definition of goods.)
S.2(39):--"Taxable Goods" means all goods other than those which have been exempted under section 13; S.2(41):--"Taxable Supply" means a supply of taxable goods made 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 2(46)(i) provides:-- "2. Definitions. -- In this Act, unless there is anything repugnant in the subject or context:
(46) "value of supply" means,--
(a) to (b) ............................................................
(i) in case the consideration for a supply is in kind or is partly in kind and partly in money, the value of the supply shall mean the open market price of the supply excluding the amount of tax: Explanation-It is clarified that the value of supply does not include the amount of subsidy provided by the federal government or provincial governments to the electricity or natural gas including re-gasified liquefied natural gas consumers and has never been chargeable to tax under the Act; Section 7 of the Act connotes:-- Determination of tax liability.--(I) Subject to the provisions of sections 8 and 88, for the purpose of determining his tar liability in respect of taxable supplies made dying a tar period, a registered person shall. subject to the provisions of section 73, he 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 tar, excluding the amount of further tax under sub-section (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 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;
10. 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. Conversely, Section 8 of the Act starts from non-obstante clause and puts 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.
11. The term "subsidy" has not been defined in the Sales Tax Act, 1990. The Advance Law Lexicon 3rd Edition Book 4 page 4524 defines subsidy:-- "Subsidy generally means money granted by the State or a public body to keep down the prices of commodities. Subsidy may be in the nature of direct or indirect Government grants on production or exportation of goods including any special subsidy on transportation of any particular product."
The Black's Law Dictionary (8th Edition), defines subsidy as:-- "A grant, usually made by the government, to any enterprise whose promotion is considered to be in the public interest. Although governments sometimes make direct payments (such as cash grants), subsidies are usually indirect. They may take the form of research-and- development support, tax breaks, provision of raw materials at below market prices, or low-interest loans or low-interest export credits guaranteed by a government agency."
The Oxford Advanced Learner's Dictionary, Sixth Edition at page 1297 clarifies subsidy as:-- "Money that is paid by a government or an organization to reduce the costs of services or of producing goods so that their prices can be kept low..."
The Webster's New Encyclopedic Dictionary at page 1838 defines subsidy as "a grant or gift of money..."
12. It is evident that subsidy is universally considered to be a welfare measure taken by the State to keep down the prices and to ameliorate the hardship faced by the society. As pointed out by the Black's Law Dictionary. It may even take the form of tax breaks. As per accepted principles of economics, price of a commodity depends on demand and supply and price is exclusively related to the consideration actually received for the sale of goods from the buyer. It is well known that the governments do provide facilities relating to infrastructure and utilities at either no price or at a price which has no relevance with the expenses incurred in providing those utilities or services. A few examples, in this context may be quoted as tolls imposed for roads utilization, water charges, hospitals, educational institutions, sewerage expenses etc. Undisputedly, the tax invoice i.e. electricity bill shows the discounted price and the related tax while the discount allowed is not only in conformity with the normal sale of electricity business practices but also approved by the government of Pakistan which is the ultimate repository of the authority of the people of Pakistan. It is pertinent to mention that the electricity is perhaps the only commodity where the same unit of commodity i.e., electricity is sold at different price to various categories like consumers utilizing different quantities of electricity, Commercial consumers, industrial consumers etc.
13. Generally speaking taxable supply is linked with taxable goods. It is evident that Government's grants to keep the ultimate burden of price of electricity low, has nothing to do with the taxability or non-taxability of goods. The sales tax is charged on goods and by no stretch of imagination, subsidy can be treated as "goods" falling in its definition under section 2(12) of the Act. The PESCO supplies "electricity" which is a taxable goods under the Act.
14. It is not understood as to how the payment of subsidy by the Government of Pakistan renders the electricity as a non-taxable supply. Section 2(11) stipulates that exempt supply means a supply which is exempt from tax under section 13. It is clear that supply of electricity to various consumers remains a taxable supply and the amount received as subsidy does not render it as non-taxable.
Thus, the law allows the adjustment of input tax relating to taxable supplies and disallows it in the case of non-taxable supplies. There is no dispute that supply of electricity cannot be termed as non-taxable goods simply due to partial financing of the electricity bills relating to the impoverished society. Infact subsidy is a welfare step to ameliorate the financial predicament of the impecunious community by the government. It is trite law that the input tax adjustment is a substantive right of the tax payer and it cannot be taken away or withheld on mere technical grounds. Reference in this regard may be made to PTCL 2006 CL. 389 & 2024 PTD 1021. It is also well settled exposition of law that a fiscal provision of a statue is to be construed liberally in favour of the taxpayer and in case of any doubt, the same is to be resolved in favour of the taxpayer/registered person. Reliance in this regard may be made on 2007 SCMR 1367--PAKISTAN through Secretary Finance and others--Versus Messrs LUCKY CEMENT and another--(1992) 66 Tax 246 (SC Pak)--Mehran Associates Ltd. Vs. CIT Karachi.
15. It has been pleaded by the counsel of the appellant that, earlier on the subject issue, a judgment reported as 2014 PTD (Trib.) 1629 has been passed in FESCO case (Faisalabad Electric Supply Company) by the Learned Bench of Appellate Tribunal Inland Revenue, wherein it was held that:-- "75. The objection of the revenue that input tax proportionate to subsidy should have been disallowed is also misplaced. Firstly, this issue was never raised at the initial stage and secondly, and more importantly, the concessional charge of Sales Tax does not mean that supplies were exempt from sales tax. The provisions of section 2(11) of the Act defines "exempt supply" as supply which is exempt from tax under section 13". But the supplies in the taxpayer's case are not exempt under section 13 of the Act. Under section 2(11) of the Act, even zero rated supplies are taxable supplies. Thus, mere concession in the charge does not make supply as exempt supply. Section 8(2) of the Act is thus, not attracted to disallow purported proportionate input tax. We are constrained to observe that the revenue is reading imaginary things in the legal provisions which are contrary to their plain and explicit meanings. Besides, input tax is allowed with reference to the purpose of the supply and the revenue is inserting their view in Section 7 that input tax should correspond to the actual supply instead of the "purpose of supply". In arriving at this conclusion, we are fortified with the ratio settled in the judgment of the Hon'ble Supreme Court of Pakistan, cited as PLD 1990 Supreme Court 68, ruling "Where the statute's meaning is clear and explicit, words cannot be interpolated. In the first place in such a case, they are not needed If they should be interpolated, the statute would more than likely fail to express the legislative intent, us the thought intended to be conveyed might he altered by the addition of new words.". The upshot of the above discussion is that we hold that the revenue, in this case, erred in law in subjecting to tax the subsidy received from the Government which was not consideration for supply of electricity and thus not chargeable to tax. The orders of the authorities below, on this point, are vacated being unlawful.
(Emphasis Supplied)
This judgment has been specifically quoted by the Assessing Officer in his order at para 12.
However, the same was neither discussed nor distinguished in the impugned order. It is important to note that the tax authorities are duty bound to follow the earlier decisions of the ATIR wherein the question of law has been determined. Reliance may be placed on the judgments reported as 2023 PTD (Trib.) 344 & 2018 PTD 2170. In these judgments, it has been specifically expounded that the decisions of the Appellate Tribunal Inland Revenue are binding on the R.T.O/Tax authorities. The law is very clear on this issue that any order passed by judicial or quasi-judicial authority, has to be supported by lawful, reasons.
In this regard, reference may be made to the judgments reported as PLD 1959 SC (Pak.) 272, PLD 1970 SC 158, PLD 1970 SC 173, 1984 SCMR 1014, 2003 CLD 105, 2005 YLR 1742, 2021 PTD 871 and 2022 PTD 1356.
16. After considering the submissions and the case laws cited above, we are of the view that the contentions of the appellant/PESCO has per force. The Federal Government has granted CONCESSION to the Electric Power Distribution Companies against the amount of subsidy and it is settled principle of law that mere concession in the charge does not make a supply as non- taxable/exempt supply. Thus, section 8(2) of the Act is not attracted in this case. Furthermore, the unreported judgment relied upon by the learned D.R is not applicable to the issue under discussion.
In that case, the issue related to supply of electricity to Tribal Areas i.e., FATA/PATA was involved. It has been held in this case that the Act, 1990 DOES NOT APPLY TO FATA/PATA under Article 247 of the 1973 Constitution. It is evident that if the Act is not applicable to certain areas, then the applicability of its various provisions and interpretations thereof is a futile discussion. As such, this judgment is not applicable to the present case.
17. The foregoing narrations, objective analysis of the issues involved in this appeal and the facts obtaining on record clearly demonstrate that the impugned Assessment order is not sustainable in law. As such, we hereby vacate the impugned show-cause notice and consequent order of the authority below.
18. The titled appeal is disposed of in the manner and to the extent as dilated supra.
19. This order consists of (11) pages and each page bears my signatures.