MUHAMMAD HALEEM, C. J.-1. Leave to appeal was granted to resolve the conflict and give an authoritative decision on the interpretation of section 3(6)(d) read with section 2(12) of the Sales- tax Act, 1951, (hereinafter referred to as "the Act").
2. In Civil Appeals Nos. 45-K of 1982, 46-K of 1982, 47-K of 1982, 48-K of 1982, 49-K of 1982 and 50-K of 1982, the appellant is Abbasi Textile Mills Ltd., while in Civil Appeal No. 82-K of 1986, the appellant is Messrs Philips Electrical Industries of Pakistan Limited. In the first set of appeals, the relevant charge years are 1955-56, 1956-57, 1957-58, 1958-59, 1959-60 and 1960-61. The appellant in these appeals manufactures and sells yarn and cloth.
3. The appellant filed Sales-tax Return for the financial year 1955-56 showing the following sales:- Cloth Rs. 56,59,663 Yarn Rs. 82,60,500 The sale of yarn also included the sale price of yam exported amounting to Rs. 15,36,600. The Sales- tax Officer, Companies Circle 1, Lahore, by order dated 13th November, 1957 levied, after completing the sales-tax assessm ent, total sales-tax to the tune of Rs. 12,81,894. While assessing the sales tax, the Sales Tax Officer did not levy any sales-tax on the export of yarn amounting to Rs. 15,36,600 nor was any sales tax levied on the raw material consumed in the manufacture of yarn exported as it was exempt from sales tax.
4. After 1960, the sales tax cases of the appellant were transferred to the Sales Tax Officer, Companies Circle 13, Karachi, who issued a notice on 19th June, 1969 to the appellant under section 28 of the Act calling upon his to file sales tax return for the financial year 1955 -56 as the raw material consumed in the manufacture of cotton yarn which was exported had escaped assessm ent. A representative of the appellant appeared in pursuance of the notice and gave the details of the yarn exported and the cotton consumed in the manufacture of cloth. The Sales Tax Officer, after rejecting the nt of 20 per cent middle-man profit, re-assessed the value of the cotton consumed in the manufacture of the exported yarn and levied sales tax amounting to Rs.31,863.
5. Similarly for the charge year 1956-57, there was levy of sales tax on the raw material consumed in the exported cloth and yarn amounting to Rs. 1,33,244; for the charge year 1957- 58 there was levy of sales tax amounting to Rs. 1,07,340 for the charge year 1958-59 there was levy of sales tax amounting to Rs. 86,295; for the charge year 1959-60 there was lev/ of sales tax amounting to Rs.
1,23,763 and for the charge year 1960-61 there was levy of sales tax amounting to Rs. 85,151.
6. The appellant filed appeals from the order of the Sales Tax Officer against all these assessments before the Appellate Assistant Commissioner of Sales-tax, B Range, Karachi, and resisted the charging of the sales tax on raw material consumed by the appellant in the manufacture of yarn which was exported, and as for the levy of sales tax on the value of yarn consumed in the manufacture of exported cloth no such plea was taken. The Appellant Assistant Commissioner by order dated 1st February,- 1971 rejected the contention of the assessee and held: "It is the fact that the purchases were made free of sales-tax on the strength of sales-tax manufacturing licence issued to the appellant and that no sales-tax was paid on the cotton consumed in the manufacture of yarn exported abroad. In this view of the matter the Sales Tax Officer was justified in taking action under section 28 and charging sales tax on the value of cotton consumed in the manufacture of yarn exported abroad!" and the appeals were accordingly dismissed.
7. Second appeals against the above order were taken to the Income-tax Appellate Tribunal, Karachi Bench, Karachi, and they were dismissed by a common order, dated 13th of July, 1971. The Income-tax Appellate Tribunal stated in the order that in the original assessments the Sales Tax Officer had taxed cotton as a raw material in the manufacture of exported goods which assessm ents were, however, reopened under section 28(2) of the Act for revising it as the raw material consumed, namely, yarn had escaped taxation. The Tribunal took note of the fact that the appellant's objections against cotton originally treated as raw material which was consumed in the manufacture of yarn and cloth which were exported was not pressed before the Appellate Assistant Commissioner and in that view of the matter held that this objection did not require any consideration at this stage. However, as regards the other objection that the raw material for the cloth manufactured was cotton and not yam was based on the fact that the basic raw material for the manufacture of yam was cotton itself and that the manufacture of cloth from the stage of spinning of yam to the stage of the weaving of cloth was an integrated process which could not be bifurcated or separated. Therefore, the cotton continued to remain the raw material which was utilised for the manufacture of cloth which was exported and it was the cotton alone which could be charged to the sales-tax and not yam as a raw material for the production of cloth. The Income Tax Appellate Tribunal rejected this contention and held: "We, however, cannot accept this argument as the appellant produces yarn which itself is liable to tax on its production unless it is utilized for the manufacture of cloth, and therefore, when the cloth is produced the partly manufactured goods is, yarn and not cotton. If the appellant's arguments were to be accepted; raw cotton, in fact, would become the 'partly manufactured goods' which would be a component or a constituent of the cloth manufactured. We shall accordingly hold that it is yarn which is 'partly manufactured goods' in respect of cloth that was produced by the appellant, and, therefore, the actions of the officers below, in directing levy of sales- tax in respect of the yarn consumed in the manufacture of cloth exported, were fully justified."
8. The appellant next filed an application under section 17(1) of the Act in the High Court for decision of the following questions of law arising from the order of the Income-tax Appellate Tribunal, namely:-- "(i) Whether the Tribunal was right in holding that the raw material consumed in the manufacture of yarn exported is liable to sales tax under the Sales Tax Act, 1951?
(ii) Whether in the case and the circumstances of the case the Tribunal was right in holding that the raw material for the manufacture of cloth exported is yarn and not cotton?"
9. The High Court by its judgment, dated 26th of November, 1981, answered both the questions in the affirmative as it came to the conclusion "that the ginned cotton used in the manufacture of yarn exported, and yam used in manufacture of cloth exported, are not exempt from sales-tax", and, accordingly, rejected the contention of the assessee which in similar terms was raised before the Income-tax Appellate Tribunal.
10. Civil Appeal No. 82-K of 1986 impugns the judgment of the High Court dated 6th May, 1985 dismissing Constitution Petition No. D-227 of 1985, wherein the demand notices dated 24th October, 1984, 29th October, 1984 and 27th November, 1984 demanding payment of sales-tax on the full quantity of bulb shells and tubes used internally in the manufacture of bulbs and tubes in the factory were challenged.
11. According to the appellant electric bulbs and fluorescent tubes were exempt from payment of sales-tax since 28th of June, 1969, and in response to the demands made the stand taken by the appellant was that glass shells and tubes were not independent goods but are in the shape and form in which molten mixture of raw materials is drawn from the furnace in the process of manufacturing electric bulbs and fluorescent tubes. Therefore, they are not covered by the meaning of the word "use" in section 3(6)(d) of the Sales-tax Act, 1951, which refers to independent use and not to the intermediate goods utilised in the manufacture of finished goods.
12. The High Court did not accept this contention and rejected it for the reasons given in the Full Bench case reported as M/s. Gul Ahmed Textile Mills Limited v. Commissioner of Sales Tax (Central)
Karachi, (now reported as PTCL 1989 CL. 183 = 7- WLR 132 LR).
13. The learned counsel for the appellants in the first set of appeals again contended that the raw material for the cloth manufactured was cotton and not yam as, according to him, the process of spinning yarn from ginned cotton to the weaving of cloth was a continuous process and could not be disintegrated, therefore, cotton continued to remain the raw material as having been utilized for the manufacture of the exported cloth and not yam as the raw material for the production of exported cloth. It was thus cotton which could be levied to sales tax and not yarn.
14. The High Court after having formulated the contention noted that the counsel raising it lost sight of the fact that the yarn which was utilized in the manufacture of cloth and other manufactured goods was liable to tax and thereafter proceeded to examine the contention with reference to the meaning of the word "partly manufactured goods" in section 2(12) in relation to the meaning of the word 'use' in section 3(6)(d) of the Act and its other provisions, and repelled the contention as aforestated. In effect, it accepted the finding of the Income-tax Appellate Tribunal that if the appellant's contention was accepted then raw cotton which is, in fact, a component or constituent of cloth manufactured would become the "partly manufactured goods" and that this cannot be so as according to the meaning given to this expression in section 2(12) of the Act; and, that in this view of .The matter, it was yarn which was partly manufactured goods in respect of cloth which was manufactured and liable to the levy of sales-tax.
15. Before us the learned counsel contended that the yarn incorporated was, assimilated in the manufacture of cloth and not retained for independent use, therefore, it would not be covered by the word "use" within its meaning in section 3(6)(d) of the Act and would not be leviable to duty as an independent article. It was in this context that reliance was placed on the case reported as Commissioner of Sales-tax vs. Shafiq Corporation Ltd. (now reported as PTCL 1989 CL 203 = 7-WLR 152 LR) which had its own distinguishing features, namely, that the assessee was exempt from the payment of tax on partly manufactured goods imported for being incorporated into end- product under section 4(b) of the Act which were in the normal course leviable to charge under section 3(1 )(b) of the Act at the stage at which they were imported but before the clearance by the Customs Authorities under section 5(l)(b) of the Act; and as the partly manufactured goods had been assimilated and lost their original shape on the critical date on which they were sought to be assessed for payment of tax, that they were held not to be leviable to duty under section 4(l)(a) and (b) of the Act at the time of their subsequent assessment. Further, on the critical date a notification was issued under section 7 of the Act granting exemption to the fans produced or manufactured by the assessee without any condition. There was, therefore, a wholesale exemption in which event the raw material which had been incorporated could not be regarded as having a separate identity for the purpose of payment of tax.
16. It was to distinguish this case from Noorani Cotton Corporation vs. Sales Tax Officer, (PLD 1965 S.C. 161) that the distinguishing features of the latter case were brought out in the judgment.
However, what is noticeable is that in the definition of the expression "partly manufactured goods" in section 2(12) the end-product is subject to tax which, according to Noorani Cotton Corporation's case, is a sufficient guarantee that the tax will be paid only with respect to the last stage of manufactured goods. In this connection it will be relevant to refer to the observations of Kaikaus, J., in that case: "The definition of 'partly manufactured goods' is that they are goods which are to be incorporated into another article. So, these provisions are a sufficient guarantee that the tax will be paid only with respect to the last stage of manufacture of goods. However, there is one difficulty which had to be removed. Suppose the manufactured article into which partly manufactured goods are to be incorporated is for some reason not liable to the payment of sales- tax? In that case if no tax is paid on partly manufactured goods no tax will be paid at all. Therefore, in the definition of 'partly manufactured goods' a limitation has been introduced that the article into which the goods are to be incorporated should be one which is liable to the payment of sales-tax. If it is not liable to payment of tax then the goods which are incorporated into it are also manufactured goods on which sales-tax has to be paid".
But where the end-product is not leviable to the sales-tax then the situation is met by the provisions of last part of section 3(6)(d), that is, the keeping of goods by the manufacturer for his own use would be regarded as sale as the scheme of the Act appears to be to ensure that sales tax is paid only at one stage. There can also be no doubt that section 3(6)(d) is a charging section according to its tenor. Here again it will be of relevance to reproduce the observations of Kaikaus, J., in regard to the connotation of this sub-section: "While it has to be accepted that the correct way of bringing a transaction within the definition of "sale" was to make a provision in the definition, there can be no doubt at all as to the intention of the Legislature in sub-section (6). It has clearly been provided that all such transactions are to be regarded as sales for the purpose of this Act. At the same time if we do not regard this transaction as a sale sub-section 6(d) becomes wholly redundant for then no need will ever arise of assessing the value in a case where manufactured goods are kept by the manufacturer. The need for such assessm ent arises only if tax is payable on goods which are kept by the manufacturer for his own use. There is one point which needs explanation here. According to section 3(4) tax on manufactured goods is to be paid when goods are delivered to the purchaser or property in the goods passes to the purchaser. It does not say that tax is payable when there is a sale. Section 3(6) on the other hand does not use the word 'purchaser' anywhere. It does not say that the keeping of goods for use by a manufacturer will amount to a delivery of goods to the purchaser or to the passing of property to the purchaser. However, it used the word 'sale' and according to the definition of sale in the Sales Tax Act a sale occurs when property passes from one person to another. If the effect of sub-section (d) be that keeping of goods by the manufacturer becomes a sale then property does pass to the purchaser. Even otherwise as we have stated the fact that value is to be computed in such a case necessarily involves that the keeping of goods by the manufacturer has become liable to the payment of sales-tax."
Therefore, the case is covered by the observations of this Court in Noorani Cotton Corporation's case. The Full Bench of the High Court of Sind in M/s. Gul Ahmed Textile Mills's case on an identical question followed the decision in Noorani Cotton Corporation's case, and held the "partly manufactured goods' leviable to sales-tax.
17. We agree with the Tribunal and the High Court that it is yam which is partly manufactured goods in respect of the cloth manufactured and exported and not raw cotton as contended. In the case of yam, it is ginned cotton which is the partly manufactured goods, and as by the notification dated 1st May, 1953 read with section 7 of the Act the exported cotton yarn was exempt from sales-tax, the ginned cotton was leviable to sales-tax until it was exempted from the levy of sales under section 7(1) of the Act by notification, dated 22nd June, 1964. Similarly cotton fabrics and cotton yarn were exempted by notification dated 11th June, 1967 from the levy of sales-tax. It is with respect to the meaning of the word "use" that the partly manufactured goods are leviable to sales-tax as their keeping by the manufacturer amounts to sale. It cannot be denied that these goods are also manufactured goods and that in that view of the matter, the argument that from the stage of spinning of yarn to the stage of the weaving of cloth was an integrated process and cannot, therefore, be bifurcated or separated, loses its weight.
18. Civil Appeal No. 82-K of 1986 is also covered by the decision in Noorani Cotton Corporation's case. Here the partly manufactured goods are glass shells and glass tubes which are incorporated into or form a constituent or component part of articles, namely, electric bulbs and fluorescent tubes which are liable to the levy of sales-tax as the end-products are themselves exempt from sales-tax.
19. It was contended that the word "use" is co-related to independent use and not consumption and assimilation of the partly manufactured goods into a finished product. The answer to this submission will be found in the following observations in Noorani Cotton Corporation's case: This situation is met by the general provision in the last part ot section 3(6) that the keeping of goods by the manufacturer for his own use would be regarded as a sale.
There is, therefore, no getting out from the levy of the sales-tax merely because the goods were assimilated into the end- product.
20. For all these reasons, we do not find any substance in these appeals which are dismissed.