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Petitioner: COLONY SARHAD TEXTILE MILLS LTD., NOWSHERA VS Respondent: SUPERINTENDENT, JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Malik Muhammad Akram, Karam Elahi Chauhan, Durab Patel Title:COLONY SARHAD TEXTILE MILLS LTD., NOWSHERA vs SUPERINTENDENT,
JUDGMENT
Reported As: 1979 SCMR 640 Result: Appeal dismissed Judgment JUDGMENT DORAB PATEL , J.-The appellant is a public limited Company incorporated under the Companies Act, 1913, and it owns a textile mill in Nowshera. This mill manufactures both cotton yarn and cotton fabrics which are sold in the country and also exported abroad. Cotton yarn and cotton fabrics have always been excisable goods under the Central Excises and Salt Act, 1944 (hereinafter called the said Act), and section 3 of this Act until its amendment in 1966 read:- "3. Duties specified in the First Schedule to be levied.-(I) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods produced or manufactured, and on all excisable services provided or rendered, in Pakistan, as, and at the rates, set forth in the First Schedule. (2) . . . . . (3) Different tariff values may be fixed for different classes --- or descrip--tions of the same article. (4) . Cotton fabrics and cotton yarn are items 15-A and 16 respectively in the First Schedule of the said Act. Duty on both these items was levied on an ad valorem basis and in view of Mr. Mumtaz Hussain's arguments I have to point out that cotton fabrics were divided into four classes; super fine, fine, medium anal course and the rate of duty depended on the quality of the cloth, It was higher on the superior varities and the position about excise duty on yarn was similar. However, textiles have been exported from the sub-continent for many years and section 37 of the said Act empowers the Central Board of Revenue to make rules to provide for the grant "of a rebate of the duty paid on excisable goods . . . Which are exported out of Pakistan". Therefore, in the
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exercise of this power, the Central Board of Revenue had framed rules in 1944 known as the Central Excise Rules. 1944, and rule 12 of these rules relates to the rebate of duty on goods exported from the country. This rule, in so far as, is relevant reads:- "12. Rebate of duty on goods exported.-(1) Rebate of the duty paid on any excisable goods may be granted by the Collector if the goods are exported in accordance with the procedure set out in the relevant provisions of Chapter IX of these rules, and subject to the conditions and limitations contained in this rule. (2) (4) ---------------.------.. (3) . . . . . . . . . . . . . . . (5) . . . . . . . . . . . . . . (6) The rebate may be granted by the Collector if he is satisfied that duty had actually been paid on the goods, which were exported, and that the goods were duly exported in accordance with the prescribed procedure. (6A), (6B) and (6C) . . . . . . . . (7) . . . . . . . . . . . . . . (8) .. . . . . . . . . . . . (9) .. . . . . --- . . . . . . . . . (10) . . . . . . . .. . . . . . . I would emphasise here that this rule provides only for the grant of a rebate and not for the refund of the excise duty paid on goods which are exported. This distinction is important for reasons which will presently become apparent. Sweeping changes were made in the said Act in 1966. This was in pursuance of the sixth amendment of the Constitution which, inter alia, empowered the Federal Government to levy excise duty on the basis of the production capacity of industrial units and plants. But, as neither of the learned counsel relied on this amendment, it would be sufficient to state here that the Finance Act of 1966, made sweeping changes in section 3 of the said Act in order to give effect to this amendment of the Constitution. Subsection (4) of section 3 of the said Act was repealed by section 4 of the Finance Act, 1966 and substituted by subsections (4), (5), (6) and (7). Only subsection (4) i< relevant to Mr. Mumtaz Hussain's arguments and it reads:- "(4) With the prior approval of the Central Government, the Central Board of Revenue may, in lieu of levying and collecting under sub-- section (1), duties of excise on excisable goods, by notification in the official Gazette, levy and collect duties on the production capacity of plants, machinery undertakings, establishments or installations producing or manufacturing such goods; and such notifica--petition shall specify- (a) the guiding principles for the determination of production capacity, (b) the production capacity, as determined in accordance with such guiding principles, of the plant, machinery, undertakings, establish--ments or installations affected by it, (c) the duty or the rate of duty on production capacity,-and (d) the manner of collection of such duty." The next three subsections which were also inserted by the Finance-Act of 1966, deal with the manner in which an aggrieved person can challenge the assessment of the production capacity of his factory, but I need not refer to them as they are not relevant to the appellant's case; and it is sufficient to observe here that Committees were set up in order to determine the production capacity of cotton mills. However, as the concept of levying a duty on the production capacity of a mill was a noval concept, guidelines had to be furnished abut the method for assessing the production capacity of mills. And, the guidelines for determining the production capacity of cotton mills were contained in a resolution of the Ministry of Finance, which was issued on the 12th of
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August, 1967. These guidelines are relevant to the submissions of the learned counsel for the parties therefore, it would be convenient to reproduce the relevant paragraphs of the resolution of the Ministry of Finance. They read:---- (4) The guiding principles, to be notified under subsection (4) of section 3 of the Act, on the basis of which the Committee should determine the production capacity of individual cotton textile factories are as follows:- (i) The national average annual production of each statutory category of cotton fabrics/cotton yarn on a per loom/spindle basis taking production of the past three years into account: (i) Category wise annual production of the individual units for the past three years or such lesser period as may be available. (iii) Category wise annual production of comparable units for the same period. (iv) Production capacity of an individual unit calculated on the basis of the technically possible maximum production potential of the plant and machinery installed in the unit, it were to aim atmaximisingits profits before tax. (v) Growth factor, keeping in view the past rate .Of improvement in production and likely increase in efficiency relating to improvement in technical managerial, labour and financial factors of individual mills, (5) The annuals production capacity of individual factories shall be expressed for each statutory category of cotton fabrics in terms of square yards and for each category of cotton yarn its terms :of. Pounds. (6) For the purpose of determining the liability to duty, of a factory the production capacity of the factory for each excise category of fabrics/yarn, determined on the basis of the above principles, will be multiplied by the statutory rate of excise duty for that category. (7) (8) The Committee should also recommend the procedure for the grant of refund in respect of various categories of cotton fabrics and cotton yarn which are exported. (9) . . . . . . . . --- .. . . . . . . ---------------------------------------------------.. The production capacity of a mill depends upon the efficiency of its Management and labour, the state of its plant and machinery, and such other considerations which may vary from mill to mill. Now, whilst, these considerations are included in the guidelines, which I have quoted, in addition to these considerations, the Committees which determined the production capacity of cotton mills, had also to take into account the annual production of comparable units and the "national average annual production of each statutory category" of cloth or yarn. And, to the extent to which these circumstances were taken into account, the production capacity of a mill would be different from its optimum production capacity. I am fortified in my opinion by the observation of the Report of the Textile Industry Capacity Committee at page 10 of the report- "The survey has revealed that the present efficiency of the textile industry is quite low. In the case of spinning, efficiency ranges generally (with exceptions) from 70 % to 95 % with the bulk of the population concentrated near the lower end of the range. The situation in the weaving sector is still worse, the general range with exceptions) being from 45 % to 85 % This observation of the Committee about the poor efficiency of the majority of mills is relevant to the appellant's claim, because the poor performance of the majority of the mills necessarily weighs down the notional average annual production, and as this is one of the five components for determining the production capacity of a mill, it follows that the production capacity of a mill whose efficiency is above the average level of efficiency in the industry will be less than its optimum production capacity. In other words an efficient mill will produce more fabric or yarn, as the case may be, than its production capacity as determined under the said Act, and, to the extent
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to which the actual production of such a mill exceeds its production capacity, the mill will not pay excise duty on the excess of its production over its production, as determined by its production capacity. Another significant feature of the guidelines is the direction to determine the. Production capacity of a mill with regard to each category of fabric and yarn. I have referred to this because Mr. Mumtaz Hussain appeared to think that this guideline was ultra vires of the objects of the said Act or of the rules framed in 1944. I am unable to accept this submission. As pointed out earlier, the rate of excise duty was always higher upon the superior qualities of fabric and yarn, and the direction to assess the produc--petition capacity of a mill with regard to each category of fabric or yarn produced by that mill was in consonance with the manner in which the said Act had been enforced since its promulgation. Now, just as the actual production of an efficient mill can exceed the production capacity of that mill, the actual production of any category of fabric or yarn produced by an efficient mill can exceed the production capacity of the mill for that category of fabric or yarn. And, similarly the quantity of fabric or yarn exported by an efficient mill may exceed its production capacity for the category of fabric or yarn exported. Therefore, it was no longer practicable to apply rule 12 of the Central Excise Rules, 1944 to the cotton industry and so the Central Board of Revenue promulgated on 22nd April, 1968, The Excise Duty on Production Capacity (Cotton Yarn) Rules, 1968 (hereinafter referred to as the yarn rules) and "The Excise Duty on Production Capacity (Cotton Fabrics) Rule, 1968" (hereinafter referred to as the Fabric Rules) rule 8 both of the yarn and of the fabric rules deal with the manner in which a cotton mill can obtain rebate of excise duty on the products exported by it, and, for the purposes of this appeal, the rules are in pari materia. I will presently examine them in detail but at this stage it would be sufficient to state that the appellant had no grievance with rule 8 of the fabric and of the yarn rules as originally promulgated. However, identical provisos were added to these rules on the 21st of June, 1968. And the appellant's plea in its concise statement is that- "the purpose of insertion of the provisos was that full rebate on the quantity of a specified Category be given only to the extent to which that category was taken into account for the purpose of calculating the production capacity of the plant and that rebate in respect of any quantity of a particular Category exported in excess of that quantity be given at the rate applicable to the next lower Category to the extent that lower Category was taken into account for the purposes of calculating the production capacity." Finally on the 31st of December, 1968, another clause was added to the aforesaid provisos in the said rules and the purport of this clause, according to the appellant, was that- "where rebate in respect of any excess quantity exported could not be given against the available quota of the next lower Category, rebate on such excess quantity may be allowed against the available quota of the higher Category to the extent to which that higher Category was taken into account for the purposes of calculating the production capacity. The rate at which the rebate was to be allowed, however, was the rate applicable to the Category actually exported." Rule 8 both of the yarn and of the fabric rules was again amended in 1971, but as the appellant is aggrieved only by the amendments in these rules of 21st of June, 1968 and of 31st of December, 1968, it is not necessary to examine the subsequent history of these rules. Reverting now to the facts of this appeal, the production capacity of the appellant's mill was determined in due course and on the promulgation of the yarn and the fabric rules, it commenced paying excise duty on its products and collecting rebate against its export under these rules. According to learned counsel, the appellant had no grievance with the yarn fabric rules as originally enacted. This is not surprising because as I will presently show the ambiguity in the rules enabled exporters of textiles to obtain what amounted to a subsidy on their exports. Therefore, it is
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not surprising that identical amendments were made in both these rules, and the effect of these amendments was to reduce the profits which exporters of textiles were making on their exports. And, as the appellant was an exporter, its profits were reduced -by the amendments. But despite these amendments it insisted on calculating its claim for rebate on the same basis as before the amendments. This led to differences between the appellant and the respondent, and for the period from the date of the amendment in these rules (21st June, 1968 to the period ending 30th June, 1969) the appellant claimed a sum of Rs. 54,63,116.10 as rebate for its exports, but as the respondent accepted the appellant's claim for a sum of Rs. 42,84,480, he called upon the appellant by his notice dated 26th July, 1969 to pay the balance of Rs. 11,78,636.10. The appellant refused to comply with this notice and filed a writ petition in the Peshawar High Court to challenge the validity of this notice and to restrain the respondent from enforcing it. The appellant's case in the High Court was that the amendments of the yarn and fabric rules of 21st June, 1968 and of 31st December, 1968 were ultra vires of the rule-making powers conferred by section 3k4), read with section 37 (2)(xvi) of the said Act. Secondly, according to the appellant, these amendments were being illegally given retrospective effect, and they were illegal on the further ground that they were inconsistent with rule 12 of the Central Excise Rule, 1944 which was still in force. Finally, according to the appellant, the impugned amendments were unjust, arbitrary and discriminated against the appellant. The respondent contested the writ petition and as Mr. Mumtaz Hussain has pressed this appeal on grounds not taken in the High Court, it would be sufficient to observe that the learned Judges of the Peshawar High Court dismissed the writ petition of the appellant by a well-considered judgment (we say so with respect) dated 23-2-1973. As the appeal turns solely on the wires of the amendments in the yarn and the fabric rules, it would be convenient to set the mouth shut. Rule 8 of the yarn rules as it stood on 22-4-1968 read: "8.-(1) Duty due on cotton yarn which is removed from a factory for export in accordance with the procedure prescribed in ,Chapter IX of the Central Excise Rules, 1944, or for removal to a licensed warehouse in accordance with the procedure prescribed in Chapter V11 of the said rules, may be deducted at the appropriate rate mentioned in sub-rule (2) of rule 3 from the monthly instalment of duty payable for that month under rule 6." Rule 8 of the fabric rules, as promulgated on 22-4-1968 read: "(1) (2) (3) Duty due on cotton fabrics which are removed from a factory for export in accordance with the procedure prescribed in Chapter IX of the Central Excise Rules, 1944, or to a licensed warehouse in accordance with the procedure prescribed in Chapter Vl1l of the said Rules, may be deducted from the monthly instalment of duty payable for that month under rule 6 at the following rates, namely: (i) Superfine cotton fabricsSeventy paisa per sq. Yd. plus two rupees and eighty paisa per lb. (ii) Fine cotton fabricsForty paisa per sq. Yard plus one rupee and seventy-- five paisa per lb. (iii) Medium cotton fabricsTwenty paisa per Sq. Yard plus one rupee and ten paisa per lb. (iv) Coarse cotton fabricsTen paisa per sq. Yd. Plus fifty-five paisas per (b.
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I now turn to the amendments in these rules and as Mr. Mumtaz Hussain admitted that the amendments in the yarn and the fabric rules were in pari materia, it is not necessary to quote rule 8 of both these rules as stood after their amendments. I will, therefore, only quote rule 8 of the fabric rules amended on 21-6-1968 it read (1) . . . . . . . . (2) .. . . . . . . . . . . . . (3) Duty in respect of cotton fabrics which are removed from a factor. For export in accordance with the procedure prescribed in Chapter U of the Central Excise Rules, 1944, or to a licensed warehouse accordance with the procedure prescribed in Chapter VII of the said Rules, may be deducted from the monthly instalment of duty payable for that month under rule 6, at the following rates, namely: (i) Superfine cotton fabrics Seventy paisa per sq. Yard plus two rupees and eights paisa per lb. (ii) Fine cotton fabricsForty paisa per sq. Yard plus one rupee and seventy-five paisa per lb. (iii) Medium cotton fabricsTwenty paisa per sq. Yarn; plus one rupee and ten; paisa per lb. (iv) Coarse cotton fabricsTen paisa per sq. Yard, plus fifty-five paisa per lb. Provided that such deduction of duty shall be admissible separately in respect of each category of cotton fabrics up to the maximum of the production capacity of that category on which duty is leviable under rule 3: Provided further that if the quantity of any category of cotton fabrics removed from the factory during a financial year I n accordance with this sub-rule exceeds the production capacity of that category on which duty is leviable under rule 3, then in respect of the excess quantity deduction of duty may be allowed against the production, capacity of any other category of cotton fabrics on which duty is leviable under rule 3 at lower rate, subject to the condition that the total of such quantity and of the quantity of that other category of cotton fabrics removed under this sub-rule does not exceed the produc--petition capacity of that other category. Finally, the following clause was added to this rule after the words "does not exceed the production capacity of that other category" by the amendment of 31-12-1968: "And where deduction of duty in respect of any excess quantity or any part thereof cannot be so allowed, deduction of duty in respect of such excess quantity or part may be allowed against the production capacity of any other category of cotton fabrics on which duty is leviable under rule 3 at a higher rate but such deduction shall be allowed at the rate of duty prescribed in rule 3 for the category of fabrics which is removed from the factory, subject to the condition that the total of such quantity and of the quantity of that other category of cotton fabrics removed under this sub- rule does not exceed the production capacity of that other category." I will now examine these rules, and one of Mr. Mumtaz Hussain's submissions was that rule 8, as originally framed, was valid because it was similar to and consistent with rule 12 of the Central Excise Rules, 1944. The submission is fallacious, because the similarity is only a seeming similarity. Thus, although both according to rule 12 and rule 8 if for example goods meant for export are stored in a licensed warehouse, then rebate of duty on such goods can be granted by the Collector. But, here the similarity between the rules ends and rule 12 prescribes that "rebate may be granted by the Collector if he is satisfied that duty had actually been paid on the goods which were
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exported". Mr. Mumtaz Hussain submitted that this rule entitled the exporter to the refund of the duty paid on the exported goods. Assuming that be so, it is very clear that the Collector cannot, under this rule, grant to an exporter in the guise of rebate any amount in excess of the excise duty paid or due on the exported goods, but unlike this rule, as rule 8 is ambiguous, the power conferred under it appears at first sight to be very wide, because the rule merely states that duty on fabric and yarn which are exported "may be deducted from the monthly instalment of duty payable for that month". As the rule does not in terms limit a mill's power to claim a deduction for its exports, Mr. Mumtaz Hussain thought that the rule supported his submissions, but that is not so, because the rule has been framed under clause (xvi) of subsection (2) of section 37 of the said Act which I will presently consider. At this stage, I would only observe that the rule speaks of a deduction from the monthly instalment of duty payable by a mill. Now this monthly instalment depends not on the physical capacity of a mill to produce cloth or yarn but upon the capacity as determined by the Committees se! Up for this purpose to which I referred earlier. I will, therefore, refer in this judgment to the production capacity so determined as the production capacity and if the cloth or yarn exported by a mill exceeds the mill's production capacity for the category of cloth or yarn exported how was the reimbursement under this rule to be made? The difficulty arises only in the case of efficient mills which export cloth or yarn in excess of their production capacity. And, as this is what happened in the instant case, the real question in the appeal is whether the appellant could under its claim for a rebate on exports deduct under this rule an amount in excess of the excise duty payable on the category of fabric or yarn exported. This problem could not arise under rule 12 under the Central Excise Rules, 1944, because duty under this rule is levied on actual production, and the calculation of rebate on exports does not present any problem because the rebate cannot exceed the refund of duty payable on the goods which were exported. But, as the provisions of rule 8 of the yarn and the fabric rules are ambiguous, Mr. Mumtaz Hussain submitted that the provisos, which were added to rule 8 of the yarn and the fabric rules by the amendment of 21-6-1968 and of 31-12-1968, were ultra vines and illegal, because the appellant was entitled to full rebate of the excise duty on its actual exports. Presumably on the principle that discretion was the better part of valour, learned counsel was reluctant to calarify what he meant by the appellant's liability for duty on its actual exports. Secondly, in advancing this submission, he assumed that the word "rebate" meant refund. The submission is fallacious, because rebate, according to the Oxford dictionary, means "deduction from the sum to be paid, discount, drawback". However, learned counsel relied on the fact that the respondent had permitted the appellant a refund of the excise duty against its exports. This may have been, because according to rule 8, duty on exports can be deducted by a mill from its liability for excise duty, therefore, I will assume that the respondent was allowing the appellant in 1968 a refund of the excise duty paid by it on account of its exports. But, the appellant was not paying excise duty in 1968 on its actual production. As it was only paying excise duty in 1968 on the production capacity of the categories of cloth and yarn manufactured by it, to the extent to which its exports exceeded the production capacity of the category of cloth or yarn exported, it had not paid excise duty on this excess of its exports over its production capacity. Therefore, I find it difficult to understand the appellant's claim but an illustration would help to elucidate it. I would first recall here that rule 8 has divided the types of fabrics manu--factured by mills into four categories: super fine, fine, medium and coarse. The rate of…
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