ABDUL AZIZ MEMON, JUDICIAL MEMBER.-- This appeal arises from order dated 14.11.1994 whereby Dr. M.M. Younus, Additional Secretary to the Government of Pakistan, Ministry of Finance had dismissed appeal against order of Collector (Appeals) Southern Zone, filed by the appellant, lt has been filed in pursuance of order of High Court of Sindh passed in Constitutional Petition No.666 of 1995.
2. Facts of the case briefly stated are that Head Quarters Audit Staff of Central Excise and Sales Tax, Karachi, during the course of audit of Sales Tax record of the appellants observed that they had deducted input tax from output tax to the extent of Rs. 12,67,941.23 in respect of following items during the period from October, 1991 to July, 1992 which to their mind, was not permissible in view of Section 7(2)(iii) and 10 of the Sales Tax Act, 1990 (hereinafter referred to as the 'Act'):-
(i) Iron and steel sheets. Rs.8,88,640.73
(ii) Hydrochloric Acid. Rs. 10,724.50
(iii) Spare parts and accessories. Rs.3,68,576.00 The appellants were therefore called upon to show-cause why the said amount be not recovered from them along with additional
3. The appellants contested the show-cause notice but the demand was enforced by the Assistant Collector, Central Excise and Sales Tax, Karachi. A penalty of Rs. 25,000/- was also imposed. An appeal from the said order was taken to Collector of Customs (Appeals) South Zone, Karachi but it was dismissed except for the amount of penalty, which was remitted. A revision petition filed against the said appellate order also failed. The appellant therefore filed Constitutional petition which was disposed of by a consent ing them to file appeal before this Tribunal.
4. We have heard Mr. Muhammad Nadeem, the learned counsel for the appellant. None, however, appeared for the respondent although notice of hearing was received in his office on 4.11.1997. The appeal was therefore heard in his absence.
5. The learned counsel for the appellants submitted that the appellants are manufacturers of iron and steel G.1 pipes. The raw material is normally purchase i by them from Pakistan Steel Mills for which a tax invoice is issued in their favour. There is however, an occasional increase in the demand of pipes which cannot be met from the limited supply received from the Pakistan Steel Mills. Such demand is met by purchase from other dealers who are registered with the Pakistan Steel Mills but are not required to be and as such are not, registered under Section 14 of the Act. For the goods purchased by them from the Steel Mills Tax invoices are issued in their favour. Being non-registered persons they are forbidden by law to issue tax invoices. Therefore they pass on these tax invoices to the appellants. The appellants are therefore entitled to claim adjustment of such tax which they pay to the dealers.
6. The case of the Department is that input tax in respect of iron and steel sheets and Hydrochloric Acid was not admissible under Section 7(2)(iii) of the Act inasmuch as the same were purchased from non-registered persons. This provision says that a registered person shall not be entitled to deduct input tax fi in output tax unless, in case of purchase from a non-registed person of second- hand goods, he keeps the records as pre crined in Section 22. lt will at once be seen that this provision does not apply to new goods, lt may further be seen that it places no bar on deduction of input tax paid on second-hand goods if the registered person maintains records prescribed in Section 22. There is therefore no room for doubt that the view of the lower forum on this point is contrary to law and cannot be maintained.
7. The lower forums have relied upon letter of Central Board of Revenue (hereinafter referred to as the 'Board') Bearing C. No.1(5)GST-l/91, dated 14.11.1991 which says that under clause (iii) of sub- section (2) of Section 7, a registered person is not entitled to deduct input tax from output tax in respect of goods purchased from a non-registered person unless such goods are notified by the Federal Government, lt further clarifies that no goods have so far been notified under Section 7(2)
(iii) of the Act. With due reference, this provision has been grossly mis-interpreted by the Board.
Sub-section (2) of Section 7 does not place an absolute bar on the deduction of input tax from output tax in cases mentioned in clauses (i), (ii) and (iii) of sub-section (2). The deduction of input tax paid on all taxable supplies from output tax is allowed under sub-section (1) of Section 7. The goods on which no input tax can be claimed are specified in section 8 of the Act. Sub-section (2) only puts a qualification on the right of the registered persons to claim such deductions.
8. Looking from this angle it will be seen that taxable supplies/mentioned in sub-section (1) of Section 7 have been broadly classified under following four categories in sub-section (2):
(i) supplies made in Pakistan;
(ii) supplies imported in Pakistan;
(iii) second-hand goods (supplies) purchased from non- registered persons; and
(iv) such other goods (supplies) as the Federal Government may, by notification in the official Gazette, specify.
Input tax in respect of goods (taxable supplies) falling under any of these categories can be deducted form output tax only if the conditions mentioned against each of them are satisfied. Thus a registered person who purchases second-hand goods from non- registered person shall not be entitled to claim input tax unless he keeps records as prescribed by section 22. Similarly a registered person who purchases such other goods as the Federal Government notifies, from a non-registered person shall not be entitled to claim input tax if he does not keep the said records.
The said letter did not therefore correctly interpret the law. lt was therefore not binding on the adjudicating officer although it was to be obeyed by field staff.
9. Reliance has also been placed by the Department on S.R.O. 857(l)/92, dated 22.7.1992 which prescribes procedure for claiming input tax on four items purchased from non- registered authorised dealers. This S.R.O, supports the case of appellants rather than that of the Department.
This S.R.O, ipso facto confirms that input tax paid on goods purchased from non- registered dealers is not hit by the provisions of clause (iii) of sub-section (2) of Section 7. The mere fact that other goods are not mentioned in the said S.R.O, could not take away the right of registered persons to claim input tax on goods oh which such adjustment is permitted by law.
10. Another reason advanced by the Department for not allowing the deduction of input tax from output tax is that the appellants do not hold tax invoices. The appellants have produced documents which are purportedly tax invoices issued to the non-registered persons from whom the appellants claim to have purchased the goods and assert that these documents were produced before lower forums also, lt therefore appears that the Department thinks that the tax invoices should be in the name of appellants and not those from whom they have purchased the goods. The mere fact that the tax invoices are not in the name of appellants would not, however deprive them of the benefit of section 7 if conditions laid down in sub-section 2 of the Section are satisfied, as I would presently show.
11. Sales Tax liability of registered person in respect of taxable supplies made by him is determined under sub-section (1) of Section 7 of the Act by deducting inter alia, input tax from output tax. Input tax was at the relevant time defined by subsection (9) of Section 2 of the Act as under:-
(9) "input tax, in relation to a registered person means:- (a) the tax levied under this Act on the supply of
(b) the tax levied under this Act on imported goods entered for home consumption under section 79 or 104 of the Customs Act, 1969 (IV of 1969), by that person; and (c)
12. From clause (a) of sub-section (9) of Section (2) read with sub-section (1) of Section 7 it is manifestly clear that the registered person is entitled to deduct the tax levied under the Act on the supply of goods received by him i.e. the steel sheets and Hydrochloric Acid (from the seller). The emphasis is on "tax levied on the supply" rather than the person paying the tax. There is nothing in the Act to suggest that the tax invoice should be in the name of registered person so as to entitle him to claim input tax.
13. This brings us to the question whether the appellants are entitled to claim input tax paid on spare parts and accessories, lt may be reiterated that input tax can by claimed on taxable supplies on fulfilment of conditions laid down in subsection (2) of Section 7 of the Act, except those mentioned in section 8 of the Act which reads as under:-
8. Tax credit not allowed;-(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct tax paid on:
(a) the goods used or to be used for any purpose other than for taxable supplies made or to be made by him;
(b) any other goods which the Federal Government may, by a notification in the official Gazette specify.
(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.
14. Under sub-section (b) of Section 8 of the Act, the Federal Government vide S.R.O. No.1111 (l)/90, dated 1.11.1990 has notified the following goods acquired otherwise than stock-in-trade by a registered person to be the goods in
(i) Vehicles,
(ii) Building materials,
(iii) Stationary,
(iv) Office equipment, furniture, fixtures and furnishings,
(v) Electric and gas appliances.
This means that the input tax can be claimed on all goods except those which are not used in the manufacture of taxable supplies and those goods mentioned in the S.R.O, cited above.
15. lt may further be observed that input tax is claimed on taxable supplies made in Pakistan.
"Taxable supply" as defined in sub-section (28) of Section 2 means a supply of taxable goods made in Pakistan 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 percent under section 4; and "goods" as defined in sub-section (8) of Section 2 means every kind of movable property other than actionable claims, money stocks, shares and securities. The spare parts and accessories thus squarely fall within the meaning of taxable supplies on which input tax is admissible.
16. The Department has disallowed claim of input tax on this item on the ground that it is not covered by section 10 of the Act. ln this respect support is sought from letter C. No.1(4)/GST- I/93, dated 1.11.1993 of the Board. With due deference again, section 10 has been grossly misconstrued in the said letter. Section 10 deals with situations where input tax is in excess of output tax during a tax period. The section is reproduced in extensor for better appreciation of the legal position:-
10. Excess amount to be carried forward.(1) Subject to the provisions of sub-section (2), if in relation to a tax period the total deduction of input tax and other adjustments as specified in Section 9 exceed the output tax, the excess amount shall be carried forward by the registered person to the next tax period and shall be treated as input tax for that tax period: Provided that if the excess amount is not fully covered by the tax payable during a period of six months following the tax period in which the credit first arose, the balance outstanding at the end of that period shall be refunded to the registered person as may be prescribed:- Provided further that the tax charged on the acquisition of plant and machinery shall be adjustable against the output tax in (sixty equal monthly instalments).
(2) ln case of exports the amount of input tax not covered by the output tax shall be refunded to the exporter in such manner as the Board may determine.
17. From the perusal of Section 10 it will appear that it provides for the manner in which the input tax in excess of out put tax is to be adjusted or refunded, lt has nothing to do with admissibility of a claim of input tax. The letter of the Board on the subject being against law, cannot be given effect.
18. For the reasons stated above accept this appeal and set aside the impugned orders insofar as they relates to goods in respect of which the appellants hold tax invoices, and bills of entry duly cleared by Customs under Section 79 or Section 104 of the Act, in the names of un-registered persons from whom the appellants received the supplies (raw materials).