KHALIL MASOOD MEMBER (TECHNICAL).-(1). These appeals have been filed against the aforestated orders-in- Appeals, passed by the learned respondent No. 1, on appeal by the appellant against respective Orders-in-Originals, passed by the learned respondents No. 2.
2. We heard these appeals at length and have also carefully considered the records of these cases.
The counsels/consultant to the appellants vocally stressed by and large the following points:-
(i) Mr. Usman Consultant appearing on behalf of M/s. Sindh Alkalis Ltd. Stressed that during December, 1992 to August, 1993 when the appellant claimed adjustment of input tax credit on imported/locally purchased components/parts of plant and machinery, they were acting entirely in accordance to the law i.e. Second proviso to section 10 of the Sales Tax Act and that their right/entitlement to deduct/adjust sales tax paid/charged from output tax was conferred by section 7(2) of the said Act being the substantive law. He emphasized that plant and machinery as mentioned in section 10(2) connotes/includes also spare parts as well as components of such plant and machinery as unless otherwise specified or of general use, these are also classified in the Pakistan Customs Tariff Chapter 84 and 85 in the same heading in which such plant and machinery falls and in several SRO's relating to sales tax e.g. SRO. 1073(I)/81, dated 30.09.1981 machinery is defined as including components and spares of machinery.
(ii) Mrs. Navin^Merchant appearing on behalf of M/s. A1-Abbass Sugar Mills Ltd. Stressed that denial of claim of input adjustment in respect of spares represented mis-interpretation of law as well as SRO 578(I)/98, dated 12.06.1998, and conclusion about irrelevance of Supreme Courts decision was unfounded as Attock Cement case decision was equally applicable and that respondent failed to comprehend the meaning of "taxable supply". Thus the items acquired by the appellant were purely used for maintenance of machinery and input tax adjustment was rightly claimed.
(iii) Mr. S.M.A. Askari the consultant appearing on behalf of the appeal No. I0O to 104 as mentioned above vocally stressed by and large the following points:- A. The Act empowers the Federal Government to disallow the adjustment of input tax against out put tax as are specified by issuing a notification in the official gazette vide section 8(l)(b) of the Act which reads "
(b) any other goods which the Federal Government may, by a notification in the official gazette, specify."
Thus specifying the goods on which input tax adjustment is disavowed is mandatory. This view has been confirmed by the Judgment of the Hon'ble Supreme Court of Pakistan by the order passed on 04.03.99 on civil appeal No. 929/95. (Attock Cement (Pakistan) Ltd. Vs. Collector of Customs. (PTCL 2001 CL. 509).
B. The order dated 04.03.99 of Hon'ble Supreme Court is fully applicable on the case of the appellants as it has been held that the show cause notice issued on the basis of SRO. 1053(I)/93 for recovery of Tax adjustment against out put tax notwithstanding the provisions of the said SRO was void as the names of the goods which tax adjustment was disallowed were not mentioned.
Identical is the case of the appellants as they had claimed input tax of goods which were useable in the manufacture of taxable goods but were not the constituents thereof and input tax adjustment thereon was disallowed by SRO. 1307(I)/97 without mentioning here name therein.................... (sic)........ Court of Pakistan is not tenable because the Hon'ble Supreme Court, by that order, did not hold that SRO 1053(I)/93 was valid and within the parameters of section 8(l)(b) of the Act. The order was set aside on technical grounds and the petitions converted into appeals.
Besides that the order setting aside the order of the Hon'ble Court of Lahore is dated 24.12.98 and the order passed on civil appeal No. 929 filed by M/s. Attock Cement is dated 04.03.99 and both the orders are not in conflict with each other, the later shall prevail.
C. It is the settled law that judicial precedents come next to the codified or other law because they clarify the laws and make them certain. Judicial precedent is a decision, which contains in itself, a principle. The underlying principle which thus forms its authoritative element is often termed the ratio decidendi. The concrete decision is bringing between the parties to it. But it was the abstract ration decidendi which alone has the force of law as regards the world at large. The only judicial principles which are authoritative are those -""Which are relevant in their subject matter and limited in their scope. Observations of the Supreme Court having binding force, following them is obligatory in view of article 189 of the constitution of Pakistan, 1973.
The Collector, Sales Tax, Appeals-I, Karachi has allowed the appeal in respect of claim of adjustment of input tax notwithstanding the provisions of SRO. 1307(I)/97 filed by M/s. Kamran Distributors.
3. The representatives of respondent vehemently opposed the arguments advanced and firmly stood behind the averments forming the basis of conclusion drawn by the respondent No. 1, who upheld the impugned order with following observation:-- "As the outset, I took into account the prime important point of the appellant that within the specific rim of SRO. 1307(I)/97, dated 20.12.1997 input adjustment is only restricted against the goods which are not direct constituent of taxable goods. He added that the Honourable Lahore High Court has already held SRO. 1307(I)/97 as invalid and without any lawful authority in his judgment passed against the writ petition No. 9262, dated 24.12.1998, as the said notification does not specify the goods against which the input adjustment is not allowed. On the contrary, the departmental representative denied the motive of the appellant. He asserted that it transpired from the bare perusal of section 8(1) of the Act that input tax can not be claimed on any goods which are used or to be used for any purpose other than for taxable supplies. He further added the SRO. 1307(I)/97 was also ' issued in accordance with the aforementioned provisions of the Act, and was in absolute command and validity. Moreover, as regards the judgment of Lahore High Court in writ petition No. 9272, dated 24.12.1998, it had already been declared by the Honourable Supreme Court of Pakistan in the case of Central Board of Revenue Vs. Sheikh Spinning Mills Limited vide Civil petitions Number 1986-L, 1987-L, 1995-L, 1996-L, 2012- L, 2013-L of 1998, that "In our view the learned Judge in Chamber was not justified in granting a general declaration in respect of the above notification dated 20.12.1997, in the absence of any specific instance of denial by the department." He argued that the intention of Honourable Supreme Court of Pakistan is crystal clear from these plain and unambiguous verdict. Consequently, the argument of the appellant made with reference to the judgment of Lahore High Court has no legal sanctity.
I have also taken into account the order of Honourable Supreme Court of Pakistan, in the case of Attock Cement Vs. Collector of Customs, Quetta (PTCL 2001 CL. 509), in civil appeal No. 929 of 1995 dated 04.03.1999, placed as precedent by the appellant, in which the Honourable Court has already held that, "having come to the conclusion that assessories and spare parts having not been included by the Federal Government under section 8(2) of the Act, the appellant was entitled to claim adjustment of the input tax." On the contrary, the departmental representative argued that the placed judgment cannot be applied in the instant case as the judgment of the Honourable Court was announced with reference to SRO. Ill l(I)/90, dated 1.11.1990 and another SRO. 1053(I)/93, dated 30.10.1993, and hence, has no relevancy with the case in contest, which is based upon the authority of SRO. 1307(I)/97 dated 20.12.1997. Moreover, the appellant challenged and filed the appeal against the authority of SRO. 1307(I)/97, dated 20.12.1997, on the grounds that the Honourable Lahore High Court has already declared the said SRO without lawful authority, which was subsequently declared defective by the Honourable Supreme Court of Pakistan. Therefore, in the circumstances, when the Honourable Supreme Court of Pakistan in the same case has already held that the decision made by the Lahore High Court is not justified. To me the arguments made by the departmental representative in the aforementioned two para's has lawful veracity, which are hereby sustained on its merit".
4. These cases essentially revolves round the principle as determined in the judgment given by Honourable High Court in writ petition cited earlier and the Hon'ble Supreme Court's authoritative view in this regard, which have both been considered by learned respondent No. 1, and the appeals were rejected as according to him these have no relevancy in the cases under appeal. For reaching this conclusion he merely relied on the view of departmental representatives rather than independently applying his own mind as the departmental representative persuaded the respondent No. 1, into believing that judgment of Honourable High Court was announced with reference to SRO. Ill l(I)/90, dated 01.11.1990 and another SRO. 1053(I)/93, dated 30.10.1993 and not in respect of SRO. 1307(I)/97, dated 20.12.1997 which is relevant in appellant's case and that the Honourable High Court's judgment were declared to be defective by Supreme Court, which held that the decision made by the Honourable High Court was not justified. It is imperative to examine"the aforementioned SRO's as well as superior Court's judgments to determine how far the conclusions drawn by the learned respondent's about the irrelevancy of these judgments are relevant or well founded or whether these are based on total lack of appreciation of subtle law points involved coupled with lack of application of mind.
5. The seriousness of application of mind is quite evident from the fact that the very second para of the cited Honourable High Court's judgment mentioned that the petitioner have challenged SRO.
1307(I)/97, dated 20.12.1997, and thus the judgment in the case is the outcome of consideration of this very issue. Not only that the short order of the Supreme Court also related to the aforestated SRO which was assailed by the many petitioners cited in the order. This makes it abundantly clear that the mind of the learned respondent was totally manipulated by the representatives of the department and he was misled into believing that the superior Courts judgments were irrelevant to the cases of the appellant before him. He thus passed orders without any serious application of mind. Had he dispassionately dealt with the appeals and considered all aspects relevant to the cases, his decision, whether right or wrong could have been considered well founded which unfortunately is not the case.
6. This whole case deals with questions emanating from provisions of law and subordinate law annunciated in shape of SRO's along with various rulings issued by CBR from time to time. Crux of the matter is admissibility or otherwise of input adjustments in terms of provisions. We deal with these provisions of law first and well then touch upon the implications of SROs. The basic provision of law which deals with admissibility of input tax is Section 7 of the Sales Tax Act, while the main provision of law which dealt with denial of input tax adjustment is embodied in Section 8 of the Sales Tax Act, 1990 sub-section (1) of which being1 very pertinent is reproduced below:- "8. Tax credit not allowed.- (1) Notwithstanding any other provision of this Act, a registered person shall not be entitled to reclaim input 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." This Section order to its substitution as above by Finance Act, 1996 stood as follows:- "8. Tax credit not allowed.-(1) Notwithstanding any other provision of this Act, a registered person shall not be entitled to reclaim input tax paid on-
(a) goods used for making exempt supplies under Section 13; and
(b) any other goods which the Federal Government may, by a Notification in the official Gazette, specify."
Section 10(1) of the said Act also having some bearing on issues involved is also reproduced below:- "Refund of Excess amount of input tax. -Subject to the provisions of sub-section (2), if in relation to a tax period the total deduction of input tax and other adjustments specified in section 9 exceed the amount of output tax, the excess amount outstanding at the end of that period shall be refunded to the registered person within [ninety] days of filing of tax return subject to such conditions as may be specified by the Board: Provided that the refund shall also be admissible to the registered person, who, at the tie of taking delivery of taxable plant and machinery, its components and spare parts is not making taxable supplies, subject to the condition that he shall, within the period specified by the Board by notification in the Official Gazette, commence taxable supplies and complies with such other conditions as are specified therein.
Provide further that the Board may, by notification the official Gazette, restrict or regulate the amount of refund claimed by a person as input tax credit to such extent and in such manner as it, may specify therein.]"
8. A number of SROs have been issued over the years in pursuance of these provisions of law. It will be worthwhile to mention all these to gauge the mindset of the executive reflected in implementing the aforestated provisions of law. The following SROs have been issued since the promulgation of the Tax Act since 1990:- "SRO. LIII(I)/90, dated 01.12.1996.--In exercise of the powers conferred by clause (b) of sub-section
(1) of Section 8 of the Sales Tax Act (Amendment) Act, 1990, the Federal Government is placed to specify that the following goods acquired otherwise than stock in trade by a registered person to be the goods in respect of which input tax shall not be claimed, namely:-
(i) Vehicles.
(ii) Building materials.
(iii) Stationery.
(iv) Office equipment, furniture, figuresome and furnishings.
(v) Electrical and gas appliances.
SRO. 1053(I)/93, dated 30.10.1993.--In exercise of the powers conferred by clause (b) of sub- section (1) of Section 8 of the Sales Tax Act, 1990, and in suppression of Notification No. S.R.O. 111 l(I)/90, dated the lst November, 1990, the Federal Government is pleased to specify the goods, which are required otherwise than as stock in trade 2[or consumable stores and loose tools by a registered person to be the good in respect of which input tax shall not be claimed.
SRO. 556(I)/96, dated 01.07.1996.--In exercise of the powers conferred by clause (b) of sub-section
(1) of Section 8 of the Sales Tax Act, 1990, and, the/federal Government is pleased to specify the goods detailed in column (2) of the table below on which a registered person shall not be entitled to claim input tax credit if such goods are purchased by him for use in his registered office or the business premises.- Sr. No. Description Heading of the First Schedule to the Customs Act, 1969 (IV of 1969
(1) (2) (3)
1. Vehicles. Respective headings of Chapter 87.
2. Consumer durable of the household Such as air conditioners (window type or split), Refrigerators, microwave Ovens, deep freezers and other household appliances.Respective headings.
SRO. 1307(I)/97, dated 20.12.1997.--In exercise of the powers conferred by clause (b) of sub-section
(1) of Section 8 of the Sales Tax Act, 1990, and in suppression of its Notification No. S.R.O. 556(I)/96, dated the 1st July, 1996, the Federal Government of is pleased to direct that a registered person shall not be entitled to reclaim or deduct the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied during the course or in the furtherance of any taxable activity.
SRO. 578(I)/98, dated 12.6.1998.-In exercise of the powers conferred by clause (b) of sub-section
(1) of Section 8 of the Sales Tax Act, 1990, and in suppression of Ministry of Finance and Economic Affairs Notification No. S.R.O. 1307(I)/97, dated the 20th December, 1997, the Federal Government is pleased to specify that the following goods acquired otherwise than a stock, in trade by registered person' to be the goods in respect of which input tax shall not be claimed, namely:-
(1) Vehicles falling in Chapter 87 of the First Schedule to the Customs Act, 1969 (IV of 1969);
(2) Building materials;
(3) Office equipment (excluding electronic cash registers), furniture, fixture and furnishings;
(4) Electrical and gas appliances;
(5) Telecommunication equipments;
(6) Generators and generating sets;
(7) Wire and cables and ordinary electrical fittings;
(8) Crockery, cutlery and utensils, etceteras;
(9) Supply of food, beverages, garments, fabrics, etceteras and consumption on entertainment;
(10) Gifts and give-always.
2. This notification shall take effect from the lst day of July, 1998."
9. It will be desirable to bring on record all rulings/guidelines issued by CBR to grasp the chain of thought to determine its consistency or otherwise in terms of both law as well as subordinate legislation. The process began as follows:-
(a) C. No. 1(4)GST-I/93, Islamabad, the 10th July, 1993 From: Mr. S.A. Alam, Secretary (Sales Tax).
To: The Collector, Central Excise and Sales Tax, Multan/Rawalpindi/Peshawar/Quetta/Hyderabad.
The Collector, Central Excise and Sales Tax, Lahore/Karachi.
Subject:- Admissibility of sales tax adjustment on spare parts and accessories.
I am directed refer to the above subject and to state that it has come to the notice of the Board that some manufactures claim adjustment of input tax paid on the material which are not used directly in the preparation of taxable supplies. They claim adjustment of input tax paid on parts and accessories which are subsequently acquired as replacement parts for worn out parts of plant and machinery and other items.
2. In such cases adjustment of input tax may not be allowed as spare parts are not machinery for which the 60 instalments facility is given by law. Secondly, recovery may be effected in cases in which adjustment has been allowed in the past.
3. A report in this connection may be furnished to the Board indicating therein the total number of cases and amount of input tax already adjusted along with the number of cases where demand has been raised and the amount of recovery effected so far.
4. The first report may be sent by 31st July, 1993. Thereafter a progress report may be sent at the end of each month till recovery is made in all such cases.
Sd/- Secretary (Sales Tax)
(b) C. No. l(4)GST-I/93, Islamabad, the 1st November, 1993 From: Mr. Akhtar Ali, Secretary (Sales Tax).
To: The Collector, Central Excise and Sales Tax, Lahore/Karachi.
The Collector, Central Excise & Sales Tax, Rawalpindi/Peshawar/Multan/Hyderabad/Quetta.
Under Notification No. SRO. Ill l(I)/90, dated lst November, 1990, certain goods were specified in respect of which claim of input tax was disallowed. The said SRO has now been replaced by a new SRO; copy of which is enclosed. Under this Notification input tax credit will not be allowed in respect of all goods, which are acquired otherwise than as stock in trade by a registered person. The term "Stock in trade" shall mean goods are commodities, which are purchased for sale or for conversion into finished product.
It is also clarified that adjustment against output tax on plant and machinery in sixty equal monthly instalments is permissible under second proviso to Section 10 of the Sales Tax Act, 1990. This 'adjustment' is not "input tax credit" as allowed under Section 7 of the said Act. Adjustment on plant and machinery, therefore, has nothing to do which this input credit tax. Since maintenance of spares of machinery are distinct from plant and machinery, they are not covered under Section 10 of the Act. As already intimated by CBR Sales Tax paid on spare parts of machinery cannot be allowed as adjustment under Section 10.
As Section 10 specifically deals with adjustment of Sales Tax on plant and machinery, input tax credit cannot be claimed under Section 7 for sales tax paid on spare parts of machinery because in this case the provisions of Section 10, which is more specific, are attracted to the exclusion of provisions of Section 7 which covers every type of goods. This finding gets support from a well- established principle that general provision does not rule out specific provisions.
Sd/- Secretary (Sales Tax)
(c) C. No. 2(5)STP/99, Islamabad the 8th April, 1999.
Subject:- Admissibility of input tax credit under S.R.O. 578(I)/98, dated 12th June, 1998.
I am directed refer to the above subject and to clarify that the spares, lubricants for machinery produced taxable goods and textile printing screens producing taxable textile goods are not inadmissible for input tax credit under section 8 of the Sales Tax Act, 1990, read with S.R.O. 578(I)/98, dated 12.06.1998 effective from 01.07.1998. However the tax on such inputs if used in non-taxable activities. Shall not be admissible for credit either wholly or proportionately (as the case may be) in terms of Board's C. No. l(34)/ST.AIU/99, dated 31.03.1999 (Copy enclosed).
Sd/- Secretary (Sales Tax)
(d) C. No. 3(13)STP/96-Pt. Islamabad the 8th April, 1999.
Subject:- CLAIM OF REFUND OF INPUT TAX I am directed refer to your letter No. Nil, dated 07.01.1999 on the subject cited above and to say that input tax credits/adjustments and sales tax refund under sections 7, 8 and 10 of the Sales Tax Act, 1990, respectively on spare parts and lubricants was available subject to the conditions stipulated in the aforesaid sections read with Notification No. SRO. 556(I)/96, dated lst July, 1996 (copy enclosed) until 20.12.1997 i.e. The date the said SRO was superseded (and replaced) by SRO.
1307(I)/97 on 20th December, 1997 (Copy enclosed). The cases relating to the period from 20.12.1997 to 30.06.1998 are covered by the dais SRO 1307(I)/97, dated 20.12.1997 where the scope of adjustment/input tax credit/refund was restricted to the extent stated in the said notification.
2. At present and effective from 01.07.1998, the input tax credit/adjustments are admissible subject to the provisions of SRO 578(I)/98, dated 12.06.1998.
Sd/- Secretary (Sales Tax)
10. Now we take up the cases cited in support of the appeals:--
(1) W.P. No. 9272 of 1998 Spinning Mills Ltd. Vs. Federation of Pakistan.
(2) Civil Petition Nos. 1986-L, 1987-L, 1995-L, 1996- L, 2012-L, 2016-L, 2019-L and 2020-L of 1998.
(3) Civil Appeal No. 929 of 1995 Attock Cement Pakistan Ltd. Vs. Collector of Customs, Collectorate of Customs and Central Excise, Quetta and 4 others. (PTCL 2001 CL. 509).
11. The judgements of Honourable High Court of Lahore, Punjab dealt with a number of writ petitions in which petitioners were textile mills, who had challenged SRO. 1307(I)/97, dated 20.12.1997 in respect of denial of adjustment of tax on goods not being direct constituent and integral part of taxable goods on the ground that the impugned notification could not take away their privilege as all the provisions are to be in harmony and since clause (b) of sub-section (1) of Section 8 provided for specification of goods which was lacking in the impugned SRO, the same was illegal. It was further stressed in the petitions that the respondents were fully conscious of this fact, therefore, the said notification was substituted by another SRO which specified goods thus the conduct of the respondent clearly supported the arguments of the petitioner. The petitions were, allowed by holding that amending notification did not specify the goods which is a condition precedent to collect the tax, therefore, the same is valid to the extent of goods specified in the first notification No. S.R.O. 556(I)/96, dated 01.07.1996 as the second notification i.e. SRO 1307(I)/97 was in continuation of it.
12. The case was also taken up by the Honourable Supreme Court of Pakistan, which made the operation of the aforestated judgment of the Honourable High Court infructuous by holding that the learned Judge in chamber was not justified in granting a general declaration in respect of the above notifications dated 20.12.1997 in the absence of any specific instance of denial by the department to the respondent to reclaim or deduct the input tax paid on goods which are not the direct constituents and integral part of the taxable goods produced manufactured and supplied. It would have been appropriate to ask the respondents to approach the forums provided under the Act by providing guidelines.
13. With these observations the Honourable Supreme Court disposed off the petitions by converting the same into appeals with the following guidelines for the forum provided under the Sales Tax Act:- "The forum provided under the Act will decide the controversy at issue with reference to substantive provisions of the Act and SRO 1307(I)/97, dated 20.12:1997 and in case of any conflict between the two the substantive provision of the Act will prevail."
14. Before the forums as provided in the Sales Tax Act could authoritatively ponder over the controversies and issues involved another Supreme Court judgment given in Attock Cement Vs. Collectorate of Customs Central Excise & Sales Tax Quetta (PTCL 2001 CL. 509) illuminates the spectrum. This judgment dealt with at length the crucial question whether or not assessories and parts required for efficient and smooth running of plant or its upkeep and maintenance fall within the definition of goods or can these be treated as acquisition of plant and machinery and also what was meant by term "stock-in-trade". In the absence of any technical definition of 'stock-in- trade' the apex Court by placing reliance on dictionary meaning concluded ' that while assessories and spare parts could not be considered as stock-in-trade, plant and machinery would be construed as stock- in-trade.
15. In the light of the conclusive guidance provided by the Hon'ble Supreme Court in its short order as aforestated and also keeping in view of the decision given by another bench of Supreme Court in the above cited case, subsequently, we now proceed to examine the pros and cons of the various notifications as well as clarification/instructions issued by the Central Board of Revenue from time to time since 1990, to determine if these are ^ in consonance with the spirit of the substantive law and thus in conformity with the law or represent a departure and thus being in conflict with the substantive provision of the law of no legal consequence. jJ I6. It is quite evident that section 7(1) of the Sales Tax Act I allows a registered person to deduct input tax paid during a tax period for purpose of taxable supplies made or to be made by him from the output tax due from him in respect of that tax period. It is also quite clear that under Section 8(I)(b) ibid a registered person is not entitled to reclaim or deduct input tax paid on such goods, which the Federal Government may by notification specify.
17. The first notification in this regard disallowing input tax credit in respect of certain goods, if acquired other than as stock in trade, was SRO 111 l(I)/90, dated 01.1L1990. Since sales tax is a tax on consumption and since cascading is avoided in all VAT systems, the apparent intention was to allow input tax of all items except those specified. Obviously this included spare parts of plant and machinery. Tax paid on plant and machinery was also admissible as input tax. However, the mechanism for the same was provided under section 10 of the Act, which was not an enabling provision. It inter alia provided for the mechanism for ' adjustment of input tax in case of plant and machinery. Initially the adjustment was available in 60 equal months installments. Subsequently through Finance Act, 1994, it was allowed in 25 equal monthly installments. Spare parts and machine tools were also subjected to this installment procedure from the very inception regardless of whether these were as part of original equipment or as replacement parts for current use as spare parts being "Capital goods" constituted "goods" within the meaning of section 2(12) of the Sales Tax Act, 1990. Later, however, some over zealous Sales Tax Officers confined admissibility of input tax only in respect of spare parts which were used as original equipment i.e. Imported/acquired along with the machinery but disallowed in respect of those purchased for replacement of worn out parts of machinery and where input tax had already been claimed and allowed, such amount was recovered through quasi- judicial proceedings.
18. Prior to Finance Act, 1994 these officers drew strength from two communications issued by CBR vide letter C. No. 1(4)- GST/1/93, dated 10.07.1993 and letter C. No. l(4)ST/l/93, dated 01.11.1993. It was ruled that input tax on spares and assessories was not available. The justification advanced was that spares and assessories were not machinery and hence not entitled for installment facility. It was a bad ruling and against the express provisions of the Act as well as the spirit of a value added tax. The instructions contained in these letters not only represented contradictions but were also ultra vires of the substantive provisions of laws as contained in Section 7(1) and section 8(l)(b) read with section 2(12) of the Act. Section 10 not being an enabling section was not relevant at all for spare parts. The power to disallow input tax credit could only be availed under section 8 of the Act.
19. The aforestated ruling/instructions set in motion a chain of events which went on compounding confusion and contradictions. The CBR also appeared to be not obvious to the lacunas of its own creation. Hence, in November 1993, it rescinded SRO 111l(I)/90 and issued SRO 1053(I)/93, dated 20.10.1993. Under this SRO no goods were specified by name but input tax was denied to all goods which were acquired otherwise than as "stock-in-trade" or consumable stores and loose tools. At the same time another ruling was issued defining the terms "stock-in- trade" as goods and commodities purchased for sale or conversion into finished goods. It was an arbitrary definition as it excluded all taxable goods that were not used for conversion of goods into finished goods. It effectively meant that only raw materials were entitled for input tax. A distinction was also drawn between "adjustment" and "input tax credit". The CBR took advantage of the word "adjustable" used in section 10 and ruled that there was difference between "adjustment" and "deduction of input tax".
However, the word "adjustment" has not been defined in the Act and has the same connotations as "input tax deduction". The aforestated new SRO though patently in conflict with the substantive provisions of law remained in the field till it was rescinded by SRO. 9(1)191. However on the strength of CBR's rulings conveyed though letters cited above, the field officers disallowed input tax credit claims in respect of spare parts and assessories with immunity.
20. Later on the Government itself realizing the interpretation as being very harsh allowed input tax to spare and machine tools etc., by an amendment in section 10 of the Act in the Finance Act, 1994, which stipulated adjustment in 25 instead of 60 installment which situation continued till 1996 when major j changes in sales tax regime were introduced.
21. Major change effected was through notification SRO j 556(I)/96, dated 01.07.1996, which specified goods by name on | which a registered person could not claim input tax adjustment. !
This SRO held the field till 19.12.1997, and in away represented the pattern of earlier rescinded SRO 111 l(I)/90, dated 01.11.1990. In sporadic cases, the adjudicating officers still denied input tax credit on spare parts of plant and machinery although the SRO did not contain or carry any such restriction.
SRO. 556(I)/96 was also superseded by SRO 1307(I)/97, dated 10.12.1997 which again started the controversy in respect of availability of input tax credit as the SRO was couched in such a ; language that no specific goods could be identified on which j input tax credit was not admissible as the parameter it laid down j was "that or integral part of the taxable goods produced, j manufactured or supplied during the course or in the furtherance of any taxable activity of a registered person shall not be entitled | to the claim or deduct the input tax paid on goods which are not the direct constituent and integral part of the taxable goods produced, manufactured or supplied, during the course, or in the furtherance, of any taxable activity". Accordingly, the input tax credit on spares of plant and machinery was either denied by the department or the registered persons abstained from claiming input tax credit on the purchase of spare parts. It was against this SRO that several writ petitions filed which were converted into civil petition and the land mark judgment of Hon'ble Supreme Court was given.
22. We have exhaustively dealt with the whole sequence of events in the past few years to gauge the mindset of the executive. It is not difficult to discern that each new set of executives in CBR were more concerned with ensuring at all cost, it regardless of the substantive provisions of the law, the augmented recovery of revenue from sales tax. The various SRO's and clarification/instructions and rulings in pursuance of these SROs amply demonstrate that their judgment was clouded by revenue interest rather than in any way safeguarding the interest as well as sanctity of the provisions of law as embodied in section 8 of the Sales Tax Act, 1990. We cannot blame them for this approach.
23. On an in-depth assessm ent of the overall circumstances of the cases before us we have come to the conclusion that frequent changes made by the Central Board of Revenue ever since 1990 have been the outcome of a vacillating and restless mind caught between the sanctity of law and the desire to collect more revenues. In the process the substantive provisions of law were scarified at the alter of expediency and the confusion, contradiction, exercise of whims and arbitrariness of the executive officers in the field resulted in pitching the tax Collectors against the assessee and dissipated the energies and resources of both without any tangible benefits in revenue realization which was the primary purpose for these frequent changes. We are further strengthened in our findings when we apply litmus test to these changes in the light of the following observations of the apex court in Attock Cement case:- "The view point of the Central Board of Revenue had become crystal clear when having opined that the accessories and spare parts were not the goods and the deduction of input tax could be made, yet the Central Board of Revenue in the same breath observed that in the past, such deduction had been made, but that was illegal. In these circumstances, how could a member in the Central Board of Revenue adjudicate upon the controversy. Thus, we are of the view that remedy by way of an appeal before the Member, Central Board of Revenue was not an adequate remedy as envisaged under Article 199 of the Constitution and, therefore, in our view the writ petition was maintainable.
We are fortified in this view by a judgment of this Court reported as M/s. Central Insurance Co. And other v. The Central Board of Revenue, Islamabad and others 1993 SCM R 1232. In this illuminating judgment Amal Mian, J., as he then was, had observed as under:- "Though the Central Board of Revenue has administrative control over the functionaries discharging their function under the Ordinance, but it does not figure in the hierarchy of the forums provided for adjudication of assessee's liability as to the tax. Any interpretation placed by the Central Board of Revenue, on a statutory provisions cannot be treated as a pronouncement by a forum competent to adjudicate upon such a question judicially or quasi-judicially. The Central Board of Revenue cannot issue any administrative direction of the nature, which may interfere with the judicial or quasi-judicial functions entrusted to the various functionaries under a statute. The instructions and directions of the Central Board of Revenue are biding on the functionaries discharging their functions under the Ordinance in view of section 8 so long as they are confined to the administrative matter. The interpretation of any provision of the ordinance can be rendered judicially by the hierarchy of the forums provided for under the above provisions of the Ordinance, namely, the Income-tax Officer, Appellate Assistant Commissioner, Appellate Tribunal, the High Court and the Supreme Court and not by the Central Board of Revenue. In this view of the matter, the interpretation placed by the Central Board of Revenue on the relevant provisions of the Ordinance in the Circular can be treated as administrative interpretation and not judicial interpretation.
If there is a departure for the law involved in the provision for relaxation contained in the Circular, then that Circular is to the extent of the deviation, invalid and ineffective, and power thereunder is illegally exercise."
24. Thus the upshot of the whole exercise is that assessories and spare parts of plant and machinery whether used as original equipment or as replacement parts for current use have all along enjoyed input tax credit from the very inception of the Sales Tax Act, 1990 and all attempts to the contrary have been nullity in view of the substantive provisions of law.
25. In view of the aforestated reasons there is no hesitation in our minds in concluding that the charges being violative of the substantive provisions of law were of no legal consequence. We therefore, set aside the impugned orders and allow all the appeals agitated before us.
26. While parting with this case we could like to observe that many interpretations have been given in the past ten years to the relevant provision of law by the executive as well as the judicial forums.
The way the substantial provisions of the law are worded many more meanings would be placed on them in the future and fresh interpretations given. Unfortunately the legal changes in fiscal laws in this country are generally rushed through the Finance Bills, while presenting the annual budgets thereby not affording sufficient time to the legislature when in existence, to dispassionately deliberate upon all aspects thus preventing the collective wisdom to be manifested in the law passed in the heat and excitement of budgetary changes. Thus these changes reflect the. Mind of the executive rather than the wisdom of the legislature who after having legal changes passed through the legislature proceeds further to tailer these changes through SROs and rulings to achieve is own pre-determined objectives without realizing that, in fact, more revenues would be assured if all the irritants which are a hindrance/impediments in the optimum utilization of existing installed capacities are eliminated. The uncertainty of action on the part of field executives in the interpretations of provisions of law has become one of the biggest irritants.
27. The Hon'ble Supreme Court's Judgment holding that machinery is stock-in-trade has far reaching implications, as it will hold the field. The way efforts for uniformity in application of professional norms internationally are continuing in respect of accounting standards have also far-reaching implications. The work being done by Financial Accounting Standards Board (FASB)
USA, International Accounting Standards Committee and International Federation of Accountants aim at ensuring transparency of financial information for facilitating cross border investments in the wake of globalization by adopting uniform standards and same understanding and definition of terms. There is already broad consensus on what are fixed assets and current assets and what broadly is included in each category. While plant and machinery falls in the category of fixed assets after land and building, the term "stock-in-trade" falls in the category of current assets.
However, machinery becomes "stock-in-trade" only in the hands of a producer or dealer of machinery and not otherwise. The machinery and equipment used to produce machinery and equipment unambiguously falls in the category of fixed assets while the inventory representing produce would be termed as "stock-in-trade" and placed in the category of current assets. As it is presently worded any attempts to do otherwise are bound to- failure as has already happened through judicial decision or by CBR's guidelines in pursuance Of these decisions i.e. C. No. 3(13)STP/96, dated 13.04.1999.
28. After experience of ten years implementation of Sales Tax Act, 1990, the substantive provisions of law frequently agitated before different judicial forums and the availability of case law justifies a dispassionate fresh look at the provisions of law in particular in respect of input tax credit and its denial. If conventional wisdom is to be followed, the substantial provision of section 8 needs to be accordingly worded by specifically being tailored so that it is not capable of various and varied interpretations as has already happened. If the produce is to be linked with inputs for produce as appears to have been the effort through various SRO's and rulings issued, it needs to be specifically expressed so in the substantive provision denying the input tax adjustment to the exclusion of everything else. In that eventuality all the direct and indirect raw material forming part of the ultimate produce alone will qualify for input tax adjustment and not otherwise.
29. Having dealt with many cases, we have, however, formed the view that overall circumstances call for a more imaginative rather then a conventional approach in view of the fiercely competitive global environment being ushered in by globalization which is resulting in most efficient allocation of resources thus helping entrepreneurs, to choose locations for combining factors of production where maximum comparative advantages accrue. By conceiving a tax regime which is conducive to attracting investment to help result in most efficient and cost effective production of goods, a number of countries are enhancing their competitive advantage and attracting significant investments. This can also be achieved in Pakistan by allowing for input tax adjustments and credits in respect of everything required to create an environment to go on producing goods. In many situations along with machinery and all expenditure on its up keep, the input tax credit is also considered admissible for capital works involving use of building materials as well as vehicles for the transport of goods and workers as the necessary price to be paid for combining the factors of production in the most productive way. While no tangible case in consequence of list notified by CBR in June 1998 has yet come for consideration before us, we have serious reservations about its contents in view of the apparent contradiction with substantive provisions as presently worded. In an era of frequent power failures and load-shedding, industries can be saved from devastating consequences by ensuring uninterrupted manufacture of goods only through provision of generating sets and everything imperative for its smooth and efficient running i.e. Fuel, grease, lubricants etc. Besides, combining of factors of production is not confined to plant and machinery but also provision of adequate facilities for its housing and other capital works and installations ancillary to the same to go on producing goods which, if liable to tax, necessitate ensuring that if buildings materials etc. Have incurred tax, the same are deductible as input tax from the output tax. If the ultimate produce is exempt occasion for such action would not emerge and the element of tax would be absorbed wholly.
30. We leave it to the imagination of Central Board "of Revenue as well as the Federal Government to determine which path it wishes to choose to face the challenges of fiercely competitive emerging globalization. We are, therefore, not passing any judgment on the afore-cited aspect of the case as no case was before us.