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Petitioner: SAMI PHARMACEUTICALS (PVT.) LTD. VS Respondent: FEDERATION OF PAKISTANHonorable Justice Faisal ArabKhalid Javed Khan,Muhammad Siddiq Mirza
2019 P T D 718 [Supreme Court of Pakistan] Present: Mushir Alam, Faisal Arab and Munib Akhtar, JJ SAMI PHARMACEUTICALS (PVT.) LTD. Versus FEDERATION OF PAKISTAN and others Civil Petition No. 458-K of 2015, decided on 7th February, 2019.
(On appeal against the judgment dated 09.05.2015 passed by the High Court of Sindh, Karachi in C.P. No. D-2271 of 2011)
Per Faisal Arab, J; Mushir Alam, J, agreeing; Munib Akhtar, J dissenting.
(a) Customs Act (IV of 1969)---
----Ss. 19 & 31A---Sales Tax Act (VII of 1990) S. 13(2)(a)---Exemption from customs duty and sales tax under SRO No.575(I)/2006 dated 5.6.2006---Import of "Air Handling Units"---Certification by Engineering Development Board of Pakistan (EDB)---Procedure---Petitioner-company imported 'Air Handling Units' and sought concession on customs duty and exemption from sales tax under SRO No.575(I) 2006 dated 05.06.2006 on the ground that the 'Air Handling Units' imported were of such specification that were not manufactured locally---[Per Faisal Arab, J (Majority view): Exemption from customs duty and sales tax could not be claimed under SRO No.575(I)/2006 in case the item was either listed in the locally manufactured items notified through a Customs General Order (CGO) issued by the Federal Board of Revenue or certified by the Engineering Development Board of Pakistan (EDB) that the item in question was locally manufactured---In order to confirm whether exemption granted under SRO No.575(I)/2006 on an item was available or not one could take recourse to CGOs issued from time to time or seek certification from the EDB---Apart from seeking recourse to CGO, the need to seek certification from EDB seemed to have arisen as there was a strong possibility that a name of local manufacturer of a particular item may not have been updated in the CGO hence not reflecting the latest position of the local industry---Under SRO No.575(I)/2006, EDB had been entrusted with the function to certify whether an item was also locally manufactured which was done by gathering information from the local industry---Any person including the Customs Authorities could seek such certification---EDB's certification only confirmed a pre-existing position i.e. an item was or was not locally manufactured---In case EDB certified that imported item was also locally manufactured, exemption under SRO No.575(I)/2006 would be denied---After such certification the fact that a particular item may not have been listed in the CGO as a locally manufactured item would be of no legal consequence---Date on which certificate was issued by the EDB could not be taken as the date on which an item had become a locally manufactured item---Where a letter of credit was opened for import of an item which was already being locally manufactured and such pre-existing factual position was later certified by the EDB, it was good enough to disentitle an importer to claim exemption under SRO No.575(I)/2006---Timing of seeking certification from EDB would be immaterial in such circumstances---Only exception to this could be that the local manufacture of an item was so recent that it could not have been ordered from the local market when the letter of credit for its import was established---In such exceptional situation benefit granted under SRO No.575(I)/2006 could be availed---In absence of such an exception, the effect of certification in the affirmative by EDB would be that it confirmed that at the time when the importer opened the letter of credit in favour of a foreign supplier it was already one of the locally manufactured items and thus not entitling an importer to claim concession under SRO No.575(I)/2006---Where an item was required to be custom-built e.g. an item with the same technical specifications was required to be supplied with different dimensions not readily available in the local market even then exemption on such item could not be claimed where a local manufacturer was fully capable to supply it had an order been placed with him---In the present case, the Engineering Development Board of Pakistan (EDB) certified that the 'Air Handling Units' imported by the petitioner were also being manufactured by four local manufacturers with the same technical specifications---Moreover the petitioner sought certification from EDB on 14.3.2011 i.e. at the time when the consignment was in the process of being shipped to Pakistan, much after the letter of credit dated 9.9.2009 was opened---Petitioner was rightly denied the exemption from customs duty and sales tax under SRO No.575(I)/2006]---[Per Munib Akhtar, J (Minority view): Language used in the SRO No.575(I)/2006 in specific context of "Air Handling Units" provided that the exemption was available only to units of "specifications which were not manufactured locally"---Such condition clearly recognized that Air Handling Units came in more than one type of specifications, of which some sorts only were being locally manufactured, thus, it required that the CGO to be issued by Federal Board of Revenue, or the certificate that could be issued by the EDB, had to list (or at any rate clearly relate to) the specifications of the "Air Handling Units" that were to be regarded as being locally manufactured---Only listing without more, "Air Handling Units" (with or without their PCT heading) in the CGO or the EDB certificate would be insufficient---For purposes of exemption/ concessionary notifications, the Customs General Order 11 of 2007 dated 28.8.2007 ('CGO 11') was the relevant CGO for the present case---Entry No. 504 of the CGO 11 listed two companies that locally manufactured Air Handling Units---For CGO 11 to apply the question was not whether either of the two companies manufactured "Air Handling Units" with the same specifications as those imported by the petitioner, rather, the true and correct question was whether the petitioner's "Air Handling Units" were of the specifications as listed in CGO 11, and manufactured by the two companies---Record showed that this was not the case---Furthermore the Al-Samrez' principle enunciated by the Supreme Court in the case of Al-Samrez Corporation v. Federation of Pakistan (1986 SCMR 1917) would apply to the present case---Certificate, issued by EDB on 1.4.2011, could not, as a matter of law and for purposes of SRO No.575(I)/2006 have any retrospective effect---As a certification that "Air Handling Units" of the sort imported by the petitioner were being locally manufactured, it could only apply prospectively from the date of its issuance---In considering whether the issuance of the EDB Certificate amounted to a "withdrawal" of the exemption under SRO No.575(I)/2006 within the meaning of S. 31A of the Customs Act, 1969, a restrictive view would have to be taken---When so considered there was no withdrawal of the exemption---Exemption ceased to apply in relation to the petitioner's goods when the certificate was issued by EDB on 1.4.2011, however, that was not, in the context of S. 31A, a withdrawal of the exemption; that could take place only as a result of an act of the authority issuing the same, which would have to be the Federal Government---Petitioner was entitled to the benefit of SRO No.575(I)/2006 in respect of the "Air Handling Units" for which the goods declaration was filed on 22.7.2011; this was so by an application of the Al-Samrez principle, which was not ousted or negated by reason of S. 31A of the Customs Act, 1969]---Petition for leave to appeal was dismissed in circumstances.
Per Munib Akhtar, J
(b) Customs Act (IV of 1969)---
----S. 19---Sales Tax Act (VII of 1990) S. 13(2)(a)---Principle enunciated by the Supreme Court in the case of Al-Samrez Corporation v. Federation of Pakistan (1986 SCMR 1917)---Scope---Effective rate of duty---Scope---Principle enunciated in Al-Samrez case provided that if an importer altered his position in reliance on an exemption notification (e.g., by entering into a contract or opening a letter of credit), he then acquired a vested right in the exemption to which he remained entitled even if the exemption itself stood withdrawn by the time the goods arrived in Pakistan.
Al-Samrez Corporation v. Federation of Pakistan 1986 SCMR 1917 ref.
Khalid Javed Khan, Advocate Supreme Court for Petitioner.
Muhammad Siddiq Mirza, Advocate Supreme Court for Respondent No.1.
Vijil Ahmed Abbasi, Advocate Supreme Court and M. Iqbal Ch. Advocate-on-Record for Respondent No.2.
Muhammad Khalil Dogar, Advocate Supreme Court for Respondent No.3.
Date of hearing: 19th December, 2018.
ORDER
FAISAL ARAB, J.---The petitioner is engaged in the business of manufacture and supply of pharmaceuticals and for its newly established pharmaceutical facility the petitioner wanted to import 34 'Air Handling Units' from China for which it opened a letter of credit on 09.09.2019. The invoice described the goods as 'Air Handling Units' with VFDs and Plug Fans' classifiable under PCT Heading 8415.8300 and chargeable to customs duty at the rate of 35% ad valorem. When the first lot of 16 units arrived on 14.02.2011, the petitioner wrongly declared them as 'Air Desiccant Dehumidifier', which falls under PCT Heading 8479.8990 and chargeable to customs duty at the rate of 5%. This misdeclaration was inspite of the fact that the invoice, the bill of lading and the packing list clearly showed that the imported consignment was of `Air Handling Units'. As a consequence thereof, the petitioner was served with a show-cause notice in February, 2011 for wrongly describing the imported goods in the Goods Declaration and thus attempted to evade duties and taxes to the extent of Rs.9.47 million. The matter was adjudicated and an order-in-original was passed classifying the goods under correct PCT Heading 8415.8300. The petitioner should consider itself lucky as it escaped the penal consequences of misdeclaration and was not made to pay fine and penalty as it got the consignment of 16 units released only upon paying the usual customs duty and sales tax.
2. The present proceedings relate to the remaining consignment of 18 units which were shipped later that year and declared in Goods Declaration filed on 22.07.2011 under correct PCT Heading, however, concession on customs duty and exemption from sales tax was claimed under SRO 575(I)/2006 dated 05.06.2006 on the ground that the 'Air Handling Units' imported by the petitioner are of such specification that are not manufactured locally. We may state here that under S.R.O. 575(I).2006 plant, machinery, equipment and apparatus falling under the HS Codes specified in column (3) of its table were exempt from so much of the customs-duty as was in excess of the rates specified in column (4) of the table and the whole of the sales tax in case it met the basic condition, which is reproduced as under:--
"(i) the imported goods as are not listed in the locally manufactured items, notified through a Customs General Order issued by the Federal Board of Revenue (FBR) from time to time or, as the case may be, certified as such by the Engineering Development Board ........"
3. From the above, it is evident that exemption from customs duty and sales tax could not be claimed under SRO 575(I)/2006 in case the item is either listed in the locally manufactured items notified through a Customs General Order (CGO) issued by the Federal Board of Revenue or certified by the Engineering Development Board of Pakistan (EDB) that the item in question is locally manufactured. Hence in order to confirm whether exemption granted under SRO 575(I)/2006 on an item is available or not one can take recourse to CGOs issued from time to time or seek certification from the EDB.
4. In the present case, the petitioner vide its letter dated 14.03.2011 approached EDB to seek certification as to whether 'Air Handling Units' imported by the petitioner are being locally manufactured or not. This letter set in motion the process of determination which is evident from EDB's letter dated 15.03.2011 and the correspondence that followed. Finally, after engaging in an interactive process with the local manufacturers and the petitioner, the EDB on 01.04.2011 certified that the 'Air Handling Units' imported by the petitioner from abroad are also being manufactured by four local manufacturers. This did not satisfy the petitioner and further correspondence ensued between the petitioner and the EDB and finally a meeting was convened by the EDB on 12.05.2011 which was attended by (i) three members of the EDB, (ii) representatives of four local manufactures and (iii) the CEO as well as the consultant of the petitioner. The nine participants of the meeting unanimously came to the conclusion that there is no difference in technical specifications of the 'Air Handling Units' imported by the petitioner and those manufactured locally. Thus EDB in the said meeting further gave its stamp of approval to its certificate issued earlier on 01.04.2011.
5. Apart from seeking recourse to CGO, the need to seek certification from EDB seems to have arisen as there is a strong possibility that a name of local manufacturer of a particular item may not have been updated in the CGO hence not reflecting the latest position of the local industry. So under SRO 575(I)/2006 EDB has been entrusted with the function to certify whether an item is also locally manufactured which is done by gathering information from the local industry. Any person including the Customs Authorities can seek such certification. EDB's certification only confirms a pre-existing position i.e. an item is or is not locally manufactured. In case EDB certifies that imported item is also locally manufactured, exemption under SRO 575(I)/2006 would be denied. After such certification the fact that a particular item may not have been listed in the CGO as a locally manufactured item would be of no legal consequence.
6. It is imperative to understand that the date on which certificate is issued cannot be taken as the date on which an item has become a locally manufactured item. In case grant of exemption is reckoned from the date on which certificate was issued then any importer, in order to take advantage of this position, would first open a letter of credit for import of an item which has so far not been listed in CGO nor has been certified by EDB and then seek a certificate from EDB. Obviously the date of certification would be later in point of time inspite of the fact that the item in question was already part of the locally manufactured items. This would mean that grant of certificate either way after the letter of credit was opened would entitle an importer to claim benefits granted under SRO 575(I)/2006. This would also mean that EDB's determination of status of an item after letter of credit for its import has been established would be meaningless. In this very case the petitioner sought certification from EDB on 14.03.2011 i.e. at the time when the consignment was in the process of being shipped to Pakistan, much after the letter of credit dated 09.09.2009 was opened. In our view where a letter of credit is opened for import of an item which is already being locally manufactured and this pre-existing factual position is later certified by the EDB, it is good enough to disentitle an importer to claim exemption under SRO 575(I)/2006. The timing of seeking certification from EDB would be immaterial. The only exception to this could be that the local manufacture of an item was so recent that it could not have been ordered from the local market when the letter of credit for its import was established. In that exceptional situation benefit granted under SRO 575(I)/2006 can be availed. In absence of such an exception, the effect of certification in the affirmative by EDB would be that it confirms that at the time when the importer opened the letter of credit in fovour of a foreign supplier it was already one of the locally manufactured items and thus not entitling an importer to claim concession under SRO 575(I)/2006. We may also make it clear that where an item is required to be custom-built e.g. an item with the same technical specifications is required to be supplied with different dimensions not readily available in the local market even then exemption on such item cannot be claimed where a local manufacturer was fully capable to supply it had an order been placed with him.
7. In our view SRO 575(I)/2006 is to be interpreted in the context that the concession on customs-duty and exemption from sales tax was granted purely to encourage sale of certain types of locally manufactured items. Yet choice is still left with the buyer either to go for the local product or import it on payment of usual rates of customs-duty and taxes. In the present case, the petitioner opted to import an item which could have also been supplied by a local manufacturer had an order been placed with him thus it was not entitled to claim the concession provided under SRO 575(I)/2006. In view of the legal position discussed above, the High Court of Sindh in the impugned judgment rightly denied the relief claimed by the petitioner. This petition is, therefore, liable to be dismissed.
Sd/-
Mushir Alam, J
Sd/-
Faisal Arab, J
For the reasons set out in my judgment below, I respectfully dissent.
Sd/-
Munib Akhtar, J
MUNIB AKHTAR, J.---I have had the advantage of reading in draft the judgment proposed to be delivered by my learned brother, Faisal Arab, J., with whom my learned brother Mushir Alam, J is in agreement. It is with regret that I find myself unable to take the view that finds favour with the majority. For the reasons herein after stated, I would allow this appeal.
2. The petitioner, a company in the pharmaceutical business, seeks leave to appeal against the judgment dated 08.09.2015 of a learned Division Bench of the High Court. The petitioner claimed entitlement to the benefit of SRO 575(I)/2006 dated 05.06.2006 ("SRO 575"), whereby a partial (though substantial) exemption from customs duty and a complete exemption from sales tax at import stage, had been granted on the goods listed in the table, and on fulfilling the conditions as specified. The petitioner had imported air handling units (PCT 8415.8300), which were listed in the table. The Department having rejected the petitioner's claim it approached the High Court in constitutional jurisdiction, where the petition was dismissed by means of the impugned judgment.
3. Before proceeding further, it will be convenient to set out the relevant provisions. Beginning with SRO 575, it provided in material part as follows (emphasis supplied):
"S.R.O. 575(1)/2006.- In exercise of the powers conferred by section 19 of the Customs Act, 1969 ... and clause (a) of subsection (2) of section 13 of the Sales Tax Act, 1990 ... the Federal Government is pleased to exempt plant, machinery, equipment and apparatus, including capital goods, specified in column (2) of the Table below, falling under the HS Codes specified in column (3) of that Table, from so much of the customs-duty, specified in the First Schedule to the said Act, as is in excess of the rates specified in column (4) thereof, and the whole of Sales Tax leviable under the Sales Tax Act 1990 ... subject to the following conditions, besides the conditions specified in column (5) of the Table, namely:-
(i) the imported goods as are not listed in the locally manufactured items, notified through a Customs General Order issued by the Federal Board of Revenue (FBR) from time to time or, as the case may be, certified as such by the Engineering Development Board....;.........
TABLE
S. No
Description
PCT heading
Custom Duty
Conditions
(1)
(2)
(3)
(4)
(5)
24
Air Handling Units
8415.8300
5%
Of those specifications which are not manufactured locally."
Customs General Order 11 of 2007 dated 28.08.2007 ("CGO 11") had provided in material part as follows (emphasis supplied):
"Subject: LIST OF LOCALLY MANUFACTURED GOODS/ITEMS FOR THE PURPOSES OF CONCESSIONARY NOTIFICATIONS ETC.
The goods detailed in the appended list of this CGO are manufactured locally. This list is compiled and updated by the Engineering Development Board in consultation with stakeholders. Henceforth the appended list of locally manufactured goods is applicable for reference purposes to all the exemptions/concessionary notifications...."
Entry No. 504 from the list is relevant for present purposes. It had provided as follows:
"CGO Sr. No.
PCT HS 2007
Products
Specifications
Physical Properties
Chemical Properties
Company
.....
504
8415.8300
Air Handling Units
1500 to 50,000 cfm - Horizontal draw through - Vertical draw through - Multi Zone blow through - Single Zone blow through - Double Skin
--
--
Sabro Technologies (Pvt) Ltd. ("Sabro") ... Habibullah Industries (Pvt.) Ltd. ("Habibullah")..."
4. Learned counsel for the petitioner submitted that it had drawn up plans sometime in 2009 for establishing a pharmaceutical manufacturing facility at Karachi to produce vaccines, biotech products and lifesaving drugs. The manufacturing facilities had to be of a very sensitive nature requiring, inter alia, precise control over the quality and quantity of the air circulating through the plant. This, in turn, required use of sophisticated, customized and state of the art air handling units. The consultants engaged by the petitioner advised that the local manufacturers did not manufacture units of the sort required by it, and therefore they would have to be imported. Referring to CGO 11, learned counsel submitted that neither of the two local manufacturers listed in entry No. 504 produced the air handling units with the specifications required by the petitioner. The latter therefore had no option but to import the same.
5. It was submitted that the (irrevocable) letter of credit was opened by the petitioner on or about 09.09.2010 and in all 34 air handling units were imported there under. The goods declaration for 16 units was filed on 14.02.2011, while that relating to the remaining 18 was filed on 22.07.2011. The present dispute is in relation only to the latter. It was stated that in fact all the units had been imported at, or around, the same time, but a certain classification dispute (which need not detain us) arose and that delayed the filing of the goods declaration for the 18 units now in contention. Learned counsel submitted that duty was paid in full on the other 16 units and that is not now challenged, but was without prejudice and therefore does not affect the petitioner's claim under SRO 575 in respect of the 18 units.
6. As regards the units now in dispute, as noted above the Department took the position that they were manufactured locally. Referring to the two manufacturers listed in ertry No. 504 of CGO 11, learned counsel submitted that one, Habibullah, took the categorical position that it did not manufacture air handling units having the specifications of those imported by the petitioner. Reference was made in this regard to Habibullah's letter dated 24.03.2011 to the Engineering Development Board ("EDB") where it was, inter alia, stated by them that although "we have been manufacturing Units since last several years ... but we advise that the Units with such additional technical requirements are not manufactured by us and in our opinion are only to be imported from Foreign Special Manufacturers specialized on such Units". Insofar as Sabro was concerned, learned counsel referred to its letter dated 18.03.2011 to the EDB. There Sabro, after referring to some earlier correspondence with EDB in 2009, stated as follows: "now we have develop the capability for manufacturing the (AHUs) as per specification mentioned in your letter being imported by [the petitioner]". Learned counsel submitted that it was clear from this correspondence that Habibullah did not manufacture the air handling units of the sort required whereas Sabro only claimed the capability to do so. That, however, was not enough. Mere capacity or capability was insufficient; the goods had actually to be manufactured locally at the time of import. That was patently not the situation and hence entry No. 504 of CGO 11 did not stand in the petitioner's way. In this regard strong reliance was placed on a passage (para 32 at pg. 343) from the well known judgment of this Court reported as Sohail Jute Mills Ltd. and others v. Federation of Pakistan and others PLD 1991 SC 329 ("Sohail Jute Mills").
7. Continuing with his submissions, learned counsel referred to a certificate that was issued by EDB on 01.04.2011 ("EDB Certificate"). This is of importance and stated in material part as follows:
"DETERMINATION OF LOCAL MANUFACTURING STATUS M/s Sami Pharmaceuticals (Pvt.) Ltd. . . . On the basis of confirmation received from the local industry, it is informed that the "AIR Handling Units (AHUs)" being imported by you, are being manufactured locally by the following…
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