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Petitioner: (M/s.) Diamond Fabrics Limited, Karachi VS Respondent: The Commissioner Inland Revenue, Zone-V, Large Tax-payers Unitd, Karachi
Court Name: Appellate Tribunal Inland Revenue Judge(s): Muhammad Jawed Zakaria, Syed Ayaz Mehmood Title:(M/s.) Diamond Fabrics Limited, Karachi vs The Commissioner Inland
Revenue, Zone-V, Large Tax-payers Unitd, Karachi Case No.: M.A. (AG) No, 259/KB of 2018 and STA No, 589/KB of 2017 Date of Judgment:2018-05-10 Reported As: 2019 PTD 1166, 2019 P.C.T.L.R. 181 Result: N/A Judgment ORDER MUHAMMAD JAWED ZAKARIA, JUDICIAL MEMBER --- Miscellaneous Application (Additional Ground) as well as main appeal have been filed by the Taxpayer/Appellant/Applicant assailing the order No, STA/73/LTU/2016/10, dated October 31, 2017 passed by the learned Commissioner Inland Revenue (Appeals)-I, Karachi (CIRA). First we intend to dispose of the Miscellaneous Application (AG) whereby the Taxpayer has in addition to the original grounds of appeal, has raised the following additional grounds of appeal:-- ADDITIONAL GROUND OF APPEAL "The CIRA erred in confirming the order passed by DCIR under Section 11 of the Act, without appreciating the legal position that under Section 11 of the Act, only the Commissioner Inland Revenue is authorized to issue the notice and then pass the order thereunder" 2. As the above Additional ground of appeal go to the very root of the case which do not further require any investigation of facts, therefore, we grant the above Miscellaneous Application and our findings on the above grounds will be recorded in the subsequent paras of this Order. FACTS 3. Brief facts of the case are that the Applicant M/s. Diamond Fabrics Limited was incorporated in Pakistan on February 10, 1988 as a private limited company and later on converted into public limited company on October 8, 1988. The Company is principally engaged in manufacture and sale of cloth. The registered office or the Company is located at 173-Cotton Exchange Building, I.I. Chundrigar Road, Karachi and its mills are located at Wattoan, District Sheikhupura in the Province of Punjab.
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4. The case of the Appellant for tax periods July, 2013 to June, 2014 was selected for sales tax audit by the Commissioner Inland Revenue under Section 25 of the Sales Tax Act, 1990 (the Act) and audit proceedings were conducted. On conclusion of IDR proceedings, Show-Cause Notice under Section 11(2) was issued culminating in Order-inOriginal dated February 24, 2016. 5. In the Show-Cause Notice dated December 28, 2015 (amended through Corrigendum dated December 31, 2015), the Deputy Commissioner Inland Revenue [DCIR] disallowed input tax on the basis that proper evidences/supporting documents were not furnished to his office. 6. The [DOOR] in this case requested the appellant to respond to the notice by January 5, 2016, i,e, within 5 working days of the receipt of notice by the appellant. Appellant furnished the required details through written reply dated January 5, 2016. Appellant also requested the DCIR to allow proper opportunity of being heard in case any further details/explanation is required. The DCIR however, did not accede to the request and passed the ONO on February 24, 2016. Through ,the ONO, input tax claim of Rs, 11,478,282 was rejected. 7. The Commissioner Inland Revenue (Appeals) CIRC(A) through its appellate order No, STA/73/LTU/2016/10, dated October 31, 2017 decided the appeal against the appellant. The appellant being aggrieved filed an appeal before the honourable Appellate Tribunal Inland Revenue (ATIR) with the following grounds/additional grounds:-- "1. The appellate order passed under Section 45B of the Sales Tax Act, 1990, dated October 31, 2017 passed by the Commissioner Inland Revenue, Appeals-I (CIR-Appeals) is bad in law and on facts of the case. 2. The CIRA erred in confirming the action of the DCIR of passing the order in complete haste, without allowing proper opportunity of being heard, and without clearly appreciating the facts available on record therefore the order passed needs to be declared null and void at the outset. 3. Without prejudice to the grounds of appeal No, 2 above, the CIRA erred in confirming the action of the DCIR of passing the order under Section 11 of the Sales Tax Act, 1990 instead of relevant provisions of STA, 1990. 4. Without prejudice to grounds of appeals No, 2 to 3 above, the CIRA erred in disallowing claim of input sales tax amounting Rs, 11,478,282 without any plausible reason, merely on the presumptions and without even reviewing the pertinent details/evidences submitted by the appellant during proceedings which are available on record (i,e, copies of invoices, bank statements etc.). 5. Without prejudice to the grounds of appeals No, 2 to 4 above, the CIRA erred in disallowing the claim of input tax under Section 8 of the Sales Tax Act, 1990 read with SRO 490/2004, dated June 12, 2004. 6. Without prejudice to grounds of appeal No, 2 to above, the CIRA erred in confirming the action of the DCIR in levying default surcharge under provisions of Section 34 of the Sales Tax Act, 1990. 7. Without prejudice to grounds of appeal No, 2 to above, the CIRA has erred in levying penalty under Section 33 of Sales Tax Act, 1990. 8. The appellant craves leave to add to, amend or alter the above grounds of appeal. ADDITIONAL GROUND "The CIRA erred in confirming the order passed by DCIR under Section 11 of the Act, without appreciating the legal position that under Section 11 of the Act, only the Commissioner Inland Revenue is authorised to issue the notice and then pass the order thereunder." ARGUMENTS - TAXPAYER'S COUNSEL The learned counsel exhaustively argued on the following points:--- JURISDICTION OF THE COMMISSIONERS 8. The learned Authorized Representative (AR) of the appellant first argued on jurisdiction of the DCIR for passing the ONO and submitted that it is a well-settled principle of law that where a
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particular authority has exclusive vested with jurisdiction to proceed with a case, any attempt by any other authority to take cognizance of the matter or to institute or to initiate proceedings would render cognizance and proceeds illegal, void ab initio and of no legal effect. He further submitted that the Hon'ble Lahore High Court has not simply followed the judgment of Islamabad High Court but Hon'ble Lahore High Court has also given its own reasoning. The learned counsel, in support of his contentions; strongly placed reliance on the following judgments:-- (a) 2018 PTCL 182 (H.C. Lahore) Hamza Nasir Wire v. Federation of Pakistan] (b) 2018 PTCL 199 (H.C. Lahore) Punjab Beverages Limited v. FBR) (c) STA No, 9944.B/2017 dated 2.3.2018 [M/s. Fatima Fert. Limited] (d) STA No, 668/LB/2017, dated 18.01.2018 [M/s. Coca Cola Beverages (Pvt.) Ltd.] 9. The learned DCIR has wrongly assumed jurisdiction to make out and to adjudicate upon the instant case under Section 11 of the Act, whereas the statute directs that certain acts shall be done by a specified person, his performance by any other person is impliedly prohibited therefore whole exercise of issuance of SCN and passing of ONO by the learned DCIR should be declared illegal, void ab initio and without lawful jurisdiction. SECTION 7 OVERRIDES SECTION 8 10. In respect of merits of the case the AR submitted the DCIR disallowed the legitimate input tax claimed by the appellant related to cables, wires, electrical fittings, pipes etc. and on acquiring of taxable services under Section 7 of the Act. The DCIR disallowed such input tax on the basis that such are building materials and services and disallowed under Section 8(1)(a) of the Act read with SRO. 490 of 2004 (as amended through SRO. 450 of 2013), without appreciating that Section 7(1) of the Act forms the primary criteria for the claim of input tax and allowed all input tax whereas Section 8 of the Act, being a negative assertion, provides for the input tax not claimable. In effect, Section 8(I)(a) of the Act reiterates the position of Section 7(1) of the Act. Plain reading of the said provisions of Section 8 of the Act, however, transpires that the provision of Section 8(l)(a) are applicable where a person is engaged in making non-taxable supplies, as against the provisions of Section 8(2), which are applicable where a person is engaged in making both taxable and non- taxable supplies. In the former situation, a registered, person cannot claim any input tax, whereas in the latter case, the person may claim input tax attributable to taxable supplies only. It was argued that none of the aforesaid situation is applicable to the appellant as it is engaged only in the production of 'taxable supplies' i,e, processing, dyeing, bleaching finished textile products and stitched garments. 11. The basic principles for claiming input tax whereas remaining criteria provide for procedural conditions or place restrictions on claim of input tax on certain categories of goods or services. Reliance in this regard is placed on following case-laws:--- PTCL 20016 CL. 673 HC. Karachi [M/s. Ghandara Nissan Diesel Ltd. Vs. Collector, Large Taxpayers Unit and 2 others. PTCL 2003 CL. 411 LHC [M/s. Sheikh Spinning Mills Limited v. Federation of Pakistan and 2 others]. PTCL 2012 CL. 475 ATIR [M/s. Coca Cola Beverages Pakistan Limited, Gujranwala v. Collector of Sales Tax, Gujranwala]. 12. The learned AR vehemently submitted that the Appellate Tribunal Inland Revenue Head Quarter Bench Islamabad in case of M/s. Chashma Sugar Mills Limited held that disallowances relating to
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building/construction material under Section 8(1) and SRO.490 is against the spirit of the Act. The relevant extracts of the said decision are reproduced below:-- "5. Elaborating the grounds of appeal, the learned counsel stressed that impugned Order(s) to the extent of aforesaid 12 supplies in appeal was erred both in law and facts and was liable to be vacated for wrong assumptions of law and facts as the objected purchases and input adjusted did not come within the mischief of SRO 450(I)/2013, dated 27.05.2013 read with SRO 490(1)/2004, dated 12.06.2004 and clause (b) of sub-section (1) of Section 8 of the Sales Tax Act, 1990. Excluding input adjustment on consumption of items in business-tax related activity would be against the spirit of VAT, system governed by Sales Tax Act, 1990. The appellant also submitted that the aforesaid notification as amended by SRO 450(I)/2013, is ultra vires of the Sales Tax Act. 1990; the same is liable to struck down. The impugned SRO ex facie is against the mandate, inter alia, of Articles 4, 18, 23, 24, 25 and 77 of the Constitution of the Islamic Republic of Pakistan, 1973. He also supported his assertion by stating that Sections 7 & 8 clearly allows input adjustment of those items which are directly used in taxable activity, thus, cannot be denied. He demonstrated that how each and every item supplies under appeal was come under the exclusion of SRO 450(I)/2013. The relevant portion from memo. of appeal is reproduced below. 6. DR On the other hand reiterated the finding of the two lower fora and stated that the present case involves adjustments of input tax mainly on cement, iron and steel gas appliances etc. which is building material and clauses (e to i) of the SRO 450(1)/2013, dated 27.05.2013 disallows adjustment of input tax on buildings materials like cements, bricks, paints etc. Since the Federal Government has consciously disallowed adjustments on buildings materials by invoking powers available to it by virtue of Section 8(I)(b) of the Sales Tax Act, 1990 read with SRO 490(I)/2004. 7. We have gone through the record and heard the parties. From mere perusal of the aforesaid assertion, it is evident that the above items, being part of Manufacturing Plant, are regular and direct input of sugar/distillery industry and directly used in manufacturing of white crystalline sugar and ethanol. Since, the plant is being used for manufacturing of taxable/excisable goods, these purchases have direct relevance with taxable ,activity and their utility as claimed by the appellant has not been denied by the department. Hence, all these items come within exclusion of clause (I) "office equipment and machines (excluding electronics fiscal cash registers), furniture, structure, fixture and furnishings excluding those directly used in taxable activity: "and (g) "electrical and gas appliances, pipes, fittings excluding those directly used in taxable activity;" hence, wrongly been deemed as come within mischief Since, none of these goods fall in purview of SROs 490(1)/2013 and 450(1)/2013, therefore, the input adjustment of above said items is admissible under Sections 7 & 8 of Sales Tax Act, 1990. 8. Here it is worth to add that theme of Section 8 of the Act is to limit input tax adjustment with reference to thing goods purchased by the registered person which have no direct nexus with the taxable activity of the registered person; clause (a) of the sub-section (I) of Section 8 of the Act denies, the registered person, input tax adjustment with reference to the goods having no nexus with the taxable activity of the registered person. Underlying principle under which superior Court appreciated the proposition that a reading of Section 7(1) in juxtaposition to Section 8(1)(a) of the Act leads to the conclusion that a registered person shall be entitled to deduct input tax in the manner specified' in Section 7(1) paid on the goods used or to be used for any purpose for the manufacture or production of taxable goods or for taxable supplies made or to be made by him. The honourable Lahore High Court while following the dictum of the honourable Supreme Court of Pakistan in the case titled "Central Board of Revenue v. Sheikh Spinning Mills Limited" reported as 1999 SCMR 1442 held that the express provisions of
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substantive law like Sections 7 and 8(1)(a) cannot be nullified by the Federal Government by means of a notification issued under Section 8(1)(a), which by all means is a sub-legislative measure. Similar view was taken by the Peshawar High Court, Peshawar in the case of "Dhan Fiber Limited" reported as 2005 PTD 2012 and by the Karachi High Court in the case of Ghandara Nissan Limited reported as 2006 PTD 2066 wherein applicability of one similar SRO No, 1307(1)/97 was involved whereby adjustment on all kinds of goods was disallowed except the goods constituting integral part of the end product. Though SRO 450(I)/2013 some new goods have been added: (a) cement (b) bricks (c) paints (d) varnishes (e) pipes (/ wires (g) cables (h) electric and (i) sanitary fittings etc. to the SRO 490(1)/2004. The list is against the mandate of the Act inasmuch as it has stated that goods, though having nexus with the taxable activity of the registered person, have been denied. The registered person, in order to be in a position to undertake taxable activity would have no indulge in the utilization of cement and bricks; both of which are essential components viz. the construction of the superstructure/plan. Thus, without any plant and/or superstructure, the registered person would not be able to undertake taxable activity; thus denial of the input tax adjustment thereon is against the provision of the Act. Being part and parcel of the capital goods input adjustment cannot be denied to the Respondent Company on the goods. In view of the above, we accept this appeal and set aside the impugned order." (emphasis is ours) 13. The learned A.R. further submitted that the DCIR misunderstood the factual aspects while ,drawing the conclusion and disallowing the input sales tax. DCIR considered various types of goods under the general term of 'building material' which is not the fact in this case. While evaluating the eligibility of input sales tax; correct nature of goods needs to be identified so that the taxpayer may not be deprived from his legal right of input sales tax claim. The disallowances under Section 8(1) and SRO. 490 pertains to goods and services of varying nature. In this respect, appellant refers to the serial numbers (e) to (h) of SRO. 490 (inserted through SRO. 450 of 2013) which states various types of goods on which input sales tax has been barred. The said clauses are reproduced below:-- "(e) building material including cement, bricks, paints, varnishes, distempers etc.: (f) office equipment and machines (excluding electronic fiscal cash registers), furniture, structure, fixture and furnishings excluding those directly used in taxable activity; (g) electrical and gas appliances, pipes, fittings excluding those directly used in taxable activity; (h) wires, cables, ordinary electrical fittings and sanitary fittings, excluding those directly used in taxable activity." 14. From the perusal of the above, it is clearly evident that building material has been separately mentioned in clause (h) whereas cables, wires, electrical fittings. pipes etc. have been separately mentioned in clauses (g) and (h). It means that law itself differentiates the building material from other goods. Therefore, all the goods such as wires cables, electrical fittings, pipes etc. cannot be categorized under general term of 'building material'. Once it is clarified that these items do not fall under building material; the same should be read within complete context of the relevant clause wherein these have been mentioned in SRO. 490. Clause (e) disallows the input sales tax on building material in absolute term whereas clauses (g) and (h) does not provide absolute disallowance. Input sales tax is allowed to be claimed on these goods if the same have been used in making taxable supplies. Since, appellant is engaged in making taxable supplies only; and all the goods have been used in taxable activity of the appellant, input sales tax should be allowed, the AR pleaded. 15. It is understood that there is no concept of 'direct' or 'indirect' relationship with taxable supply to qualify for adjustment as an input tax. Further, through S.R.O. No, 212(1)/2014, dated March 26, 2014
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the Federal Government has specifically provided that input tax paid on services under any provincial sales tax on services law can be claimed against output tax to be paid under the Act. In view of the aforementioned SRO the DCIR cannot disallow any input tax on services received for the purpose of making taxable supplies. 16. The Appellate Tribunal Inland Revenue [ATIR] in a decision reported as 102 TAX 289 has also held that the sales tax law allows deduction for input tax that relates to goods that contribute directly or indirectly and even remotely towards furtherance of taxable activity. The relevant extracts of the said decision has been reproduced below for your ready reference:--- "We have noted that none of the authorities below have given any specific reason on the basis of which it has been concluded that the input tax suffered on the aforesaid items do not qualify for adjustment under the relevant provisions of law. The provisions of law authorize deduction for all such input tax that relate to Roods that contribute directly or indirectly and even remotely towards furtherance of taxable activity. At this stake the decision relied upon by the learned DR in Sankhar Sugar Mills - (2007) 96 TAX 105 becomes relevant. Relying on the same we hold that except for flower pot and lawn mover input tax on other items has been wrongly disallowed. On the said two items, we do not find any infirmity in the orders of the authorities below and the same is confirmed to this extent and for remaining amounts the orders are vacated. The consequential additional tax and penalty, however, shall not remain payable due to applicability of amnesty on the basis of which the first appellate authority decided the same listed at Serial No, (ii) in the favour of the appellant." (emphasis is ours) 17. With respect to use of goods procured with taxable activity, it was submitted by AR that there is no concept of direct/indirect use of input for the purpose of input tax admissibility under Section 8(1)(a) of the Act, it has been upheld by superior Courts in numerous other judgments, some of which are quoted below for illustrative ready reference:--- STA No, 186/LB/2012 & FEA No, 01/LB/2012; 2001 PTCL CL. 528; 2004 PTCL CL.114; 2007 PTCL CL. 694 PTD 2391 (sic); 102 Tax 289 (Trib.); and PTCL 2012 CL. 475 18. It is thus established through plethora of case-laws as per AR that the provisions of law authorize deduction for all such input tax that relate to goods/services that contribute directly or indirectly and even remotely towards furtherance of taxable activity. It is also worth highlighting that the Federal Government, in order to give effect to judgment of various fora (whereby, under purposive approach, a liberal interpretation was given to the provisions of Section 8 of the Act) amended various SROs and shortlisted the negative list of items on which input tax cannot be claimed from time to time. The said short listing was understandably done by the Federal Government to broaden the scope of input tax adjustment thereby giving full play to the provisions of Section 8(1)(a) of the Act under which input tax adjustment is permissible in relation to any item/service used or to be used for purposes of making a taxable supply. On facts, it was submitted that the confronted input tax pertains payments for those taxable services and goods in the factory and warehouse which are purely for its taxable activities of the Company. Such services and goods was inevitable as without such services and goods the Company cannot do the business expeditiously and efficiently. 19. In view of the above, it is clear that once a registered person establishes that the goods/services in question on which input tax has been paid were used or to be used directly. indirectly or even remotely for the purpose of taxable activity or for taxable supplies made or to be made by that
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person, then the person becomes entitled to the deduction of the said input tax paid by the person for the said purpose from the output tax that is due from the person in respect of a particular tax period. 20. From the above explanation, it was established as per AR that all the taxable goods/services are received directly by the appellant. Since the appellant is involved in making taxable supplies under the Act and as the above-mentioned services/goods are utilized by it during the exercise of making taxable supplies. DCIR's action to disallow the input tax on such services/goods under the mischief of Section 8(1)(a) read with SRO. 490 of 2004 is without lawful authority and of no legal effect. It may further be noted that the Superior Courts of Pakistan have held claim of adjustment/refund of input tax as dear to a taxpayer and in fact equivalent to the fundamental right to property. Any unjustified interference with such right will, therefore, not be upheld and is liable to be quashed. SRO. 490(1)/2004 read with SRO.450(I)/2013 ultra vires to the Constitution 21. The AR of the appellant also invite our attention towards legal position that SRO. 490 read with SRO. 450 have been challenged by various petitioners in the Honourable High Courts. The Lahore High Court LHC in case of JWD Su g ar and Meezan Bevera es Private Limited has striked down the amendments made in SRO. 490 through SRO. 450. The relevant extracts of the decisions through which amendments in SRO. 490 through SRO. 450 of 2013 have been striked down are as under:--- Quotation from W.P. No, 4231 of 2015 - M/s. JDW Sugar Mills Limited (LHC) 4. Quite clearly, the impugned Notification has been issued by the Federal Government in the delegated exercise of power conferred upon it under Section 8(1)(b) of the Sales Tax Act, 1990. By the holding of the Supreme Court of Pakistan in Messrs Mustafa Impex the Federal Government is the collective entity described as the Federal Government constituting the Prime Minister and Federal ministers and, therefore, neither a secretary nor a minster nor even the Prime Minister are the Federal Government taken individually and the exercise of a statutory power by any of them on behalf of the Federal Government is constitutionally invalid. This Court in W.P. No, 26772 of 2016 has held under similar circumstances a Notification to be non-est and ultra vires on this ground alone. The impugned Notification under challenging in these petitions has been issued by the Additional Secretary of the Ministry of Finance, Economic Affairs, Statistics and Revenue Division. However, the Notification does not spell out the procedural formalities which were required to be taken as held in Messrs Mustafa Impex in order to lend competence to the notification. 5. In view of the above, these petitions are accepted and the amendment brought about in SRO 490(1)/2004 by way of the impugned Notification SRO 450(1)/2013 is set aside. Quotation from W.P. No, 1622/2017- M/s. Meezan Beverages (Pvt.) Limited (LHC) The issue…
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