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Petitioner: Messrs SUFI SOAP FACTORY, LAHORE VS Respondent: THE COMMISSIONER OF SALES TAX, JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Muhammad Afzal Zullah, Saad Saood Jan, Rustam S. Sidhwa Title:Messrs SUFI SOAP FACTORY, LAHORE vs THE COMMISSIONER OF SALES TAX,
JUDGMENT
Reported As: 1992 SCMR 259 Result: Appeal dismissed Judgment JUDGMENT RUSTAM S. SIDHWA, J.---This is an appeal by Messrs Sufi Soap Factory, Lahore, appellant, against the judgment of a learned Division Bench of the Lahore High Court dated 8-1-1979 answering the question posed in the tax reference in the affirmative and thus making the appellant firm liable to sales tax. 2. The brief facts of the case are that the appellant firm is a manufacturer of indigenous soap. The appellant firm also sells raw materials connected with the soap industry. With regard to the assessm ent year 1964-65 it declared sales of soap at Rs,118,788.62 and sales of soap raw materials at Rs,159,407.31. It showed the sales of soap as liable to sales tax under the Sales Tax Act, 1951 but the sales of the raw materials as free from any such liability. The Sales Tax Officer, 'MCircle, Lahore, vide his order dated 15-6-1980, charged the sales of soap to sales tax. With regard to the sales of raw materials, which were split up as under:-- (1) Sales of Wooden Boxes, Empty drums etc. Rs,2141 (2) Sodium Silicate Rs, 5587 (3) Cotton Seed Oil Rs,51188 (4) Sales of Soda Caustic Rs,28680 (5) Rosin Rs, 8805 (6) Coconut Oil Rs,35494 (7) Tallow Rs,2751 2
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Rs, 159407 The Sales Tax Officer found that all the purchases were made from local manufacturers and importers for which the appellant firm had not filed any certificates under Rule 16 of the Sales Tax Rules, 1951. The purchases were also partly unvouched. Three of the items, namely, sales of wooden boxes, sodium silicate and cotton Seed oil were treated as exempt by the Sales Tax Officer in view of the law exempting the same. He, however, held the sales of the other four items as liable to sales tax. 3. Being aggrieved by the above order, the appellant firm preferred an appeal before the Sales Tax Appellate Tribunal. The Appellate Tribunal held that admittedly the appellant firm was a licensed manufacturer, that the normal presumption was that the raw materials had been purchased by the appellant firm on the strength of the manufacturing licence and thus without payment of sales tax and that even if it be conceded that the purchases were not made on the strength of the manufacturing licence, since the raw materials were purchased without payment of sales tax by the appellant firm and were not used in the manufacture or production of taxable goods, the said sales were liable to sales tax under section 3(1)(e) of the Sales Tax Act, 1951. The Tribunal also held that the raw materials were admittedly purchased from persons who were neither. Licensed manufacturers nor licence-holders and they had also been admittedly sold to persons other than licensed manufacturers or licence-holders and therefore, the provision of section 12(1) was clearly attracted and the levy of sales tax fully justified. The Tribunal accordingly rejected the appeal of the appellant firm. 4. Being aggrieved by the above order, the appellant firm filed a tax reference raising the following question of law:- "Whether on facts and in the circumstances of the case the Tribunal was right in holding that the goods sold by the assessee which were purchased from persons other than the licensed manufacturers or licensed whole-salers would be liable to tax under section 12(1) of the Sales Tax Act, 1951?" The reference was heard by a learned Division Bench of the Lahore High Court, which answered the question in the affirmative. 5. The appellant firm thereupon petitioned the Supreme Court for leave to appeal, which leave was granted. 6. On behalf of the appellants it is contended that it carried on two distinct operations, namely, manufacture of washing soap and sale and trade of soap raw materials, which fact has been admitted both by the Sales Tax Officer and the Sales Tax Appellate Tribunal. It is submitted that the appellant firm purchased soap raw materials from shops in Akbari Mandi, none of whom held a manufacturer's licence or a whole-saler's licence under the Sales Tax Act, except the Jallo Rosin and Therpentine Factory which held a manufacturer's licence and from whom the appellant purchased rosin. It is further contended that in respect of the soap manufactured by the appellant firm, the appellant firm was liable under section 3(1)(a) of the Act, which sales tax was paid and regarding which there is no dispute, but as regards its sales of soap raw materials to persons who were neither licensed manufacturers nor licensed wholesalers, the said sales were not chargeable under section 3 of the Sales Tax Act and therefore, the appellant was not liable for the payment of sales tax on the said sales. It is further submitted that it is an admitted position that the soap raw materials which were purchased by the appellant firm were purchased from persons who were neither licensed manufacturers nor licensed wholesalers and that they had been sold to persons who were neither licensed manufacturers nor licensed wholesalers. It is further submitted that the soap raw materials, which are the subject of dispute, were not purchased for the manufacture of soap but were purchased for direct sale and, therefore, they did not constitute 'partly
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manufactured goods', within the meaning of section 2(12) of the Act. In these circumstances, it is submitted that the application of section 12(1) does not arise, as the object of the said provision is that where a licensed manufacturer purchases goods from another licensed manufacturer or licensed whole-saler on the faith of a certificate issued by him under Rule 16 of the Sales Tax Rules, 1951, that he would use the partly manufactured goods purchased by him in the manufacture of other finished goods which would be ultimately liable to sales tax, but he does not use such partly manufactured goods but sells them to a person other than a licensed manufacturer or a licensed wholesaler and thus defrauds the Government of the sales tax which he (as the purchaser) would have paid, the Government is entitled to claim the tax which, but for the provisions of section 4 of the Act, he would have paid at the time of purchase. Since in the instant case the raw materials were not purchased from any licensed manufacturer or licensed whole-saler on the faith of any such certificate issued under Rules 14 to 16 of the Sales Tax Rules, 1951, the question of the Government having been defrauded of the sales tax payable by the purchaser does not arise. In these circumstances, it is submitted that the decisions of the sales tax functionaries below and of the High Court being against law, deserve to be set aside. 7. On behalf of the Sales Tax Authorities it is submitted that section 12(1) of the said Act clearly shows that where a licensed manufacturer purchases any partly manufactured goods without payment of sales tax and subsequently sells such goods to a person other than a licensed manufacturer or licensed wholesaler, he is liable to pay the sales tax leviable thereon under the Act. It is, therefore, contended that the appellant firm was rightly held liable for payment of sales tax on the sales of soda caustic, coconut oil, tallow and rosin. 8. I have given my anxious consideration to the arguments advanced by the learned counsel for the appellant and the Sales Tax Authorities and have also perused the record. Before dealing with the case, it is necessary to set out certain provisions of the Sales Tax Act which have relevancy to the case:-- Section 2(12)-- "partly manufactured goods" means only goods which are to be incorporated into and form a constituent or component part of an article which is subject to the tax. Section 3(1).--- There shall be levied and collected a tax on the value of- (a) goods produced or manufactured in Pakistan, payable by the manufacturer or producer; (b) goods imported into Pakistan, payable by the importer; (c) goods sold by a licensed wholesaler, payable by the licensed wholesaler; and (d) such goods or class of goods as the Board may, by notification in the official gazette, specify in this behalf which are exported from Pakistan, payable by the exporter. Section 4--- Notwithstanding anything contained in section 3, the tax shall not be payable on-- (a) goods sold by a licensed manufacturer to another licensed manufacturer if the goods are partly manufactured goods; or (b) goods imported by a licensed manufacturer if the goods are partly manufactured goods; or (c) goods imported by a licensed wholesaler; or (d) goods sold by a licensed manufacturer to a licensed wholesaler (or a licensed exporter); or (e) goods sold by a licensed wholesaler to a licensed manufacturer if the goods are partly manufactured goods; or (f) goods sold by a licensed wholesaler to another.Licensed whole-saler. Section 12.--(1) Subject to the provisions of subsection (4) of section:3, every person liable to pay tax under clause (a) or clause (c) of subsection (1) of section 3 and every licensed manufacturer who has either imported or purchased any partly manufactured goods without payment of sales tax and has subsequently sold such goods to a person other than a licensed manufacturer or a licensed whole-saler (and every licensed exporter who had sold within Pakistan the goods purchased by him without payment of sales tax) shall, in such manner as may be prescribed, pay
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the tax leviable under this Act and where the goods have been sold by a licensed manufacturer (or a licensed exporter) in the circumstances specified above, the tax which should, but for the provisions of section 4, have been paid in respect of such goods at the time of their importation or purchase, as the case may be, within thirty days of the end of the month in which the goods in respect of which the tax is payable were sold). (2) When any tax or penalty is payable in consequence of any order passed under or in pursuance of this Act, the Sales Tax Officer shall serve upon the assesses a notice of demand in the prescribed form specifying the sum payable. (3) Any sum payable in accordance with subsection (2) shall be paid within the time and in the manner specified in the notice of demand. (3-A) The Sales Tax Officer shall have power to extend the time as provided in subsection (3) on application made in that behalf. (4) If a person fails without reasonable cause to pay tax as provided in subsection (1), subsection (3) or subsection 3-A, the Sales Tax Officer may direct that such person shall pay, by way of penalty, a sum not exceeding one thousand rupees and, in the" case of a continuing default, a further sum not exceeding fifty rupees for every day during which the default continues." 9. The case relates to assessm ent year 1964-65. At that stage the sales tax was a one point tax. It was not payable by every seller of goods. It was only payable on-- (a) goods produced or manufactured in Pakistan, by the producer or manufacturer; (b) goods sold by a licensed wholesaler, by the licensed wholesaler; (c) goods imported into Pakistan, by the importer; and (d) such goods or class of goods as the Board may have, by notification in the official gazette, specified in this behalf, which were exported from Pakistan, by the exporter. Under section 8 of the Act, all manufacturers, producers and exporters had to take out an annual licence, whereas under section 9, bona fide wholesalers could, at the discretion of the Central Government; be granted an annual licence, subject to furnishing of certain security, etc. In order to enable the licensed manufacturers, wholesalers and exporters to sell, import or export partly manufactured goods to other licensed manufacturers, wholesalers or exporters free of sales tax, section 4 excluded certain goods covered by certain transactions from payment of sales tax. The effect of this exclusion provision was to enable partly manufactured goods to be used in, wrought into, or attached to other finished products which were liable to tax and to ensure that such partly manufactured goods could be purchased, imported or exported tax free; thus supporting the scheme of one point tax. In order to enable the licensed manufacturers to purchase partly manufactured goods from other licensed manufacturers or wholesalers free of tax, subject to the condition that they would use the partly manufactured goods in the finished product to be produced or manufactured by them, which would ultimately be liable to sales tax, section 4 of the Act excluded such goods from liability to sales tax. Where, however, it was found that the licensed manufacturer had either imported or purchased any partly manufactured goods without payment of sales tax and had subsequently sold such goods to a person other than a licensed manufacturer or a licensed wholesaler, by the application of section 12(1) of the Act he was made liable for the sales tax which would, but for the provisions of section 4, have been paid in respect of such goods at the time of their importation or purchase, as the cake may be. 10. In order t understand what constitutes "partly manufactured goods", the case of M/s. Oorani Cotton Corporation (PLD 1985 SC 161) is of some assistance, wherein this Court held that the scheme of the Sales Tax Act, 1951, was to levy sales t only once on manufactured or produced goods which were offered for sale to the customer. In respect of a person who himself manufactured or produced goods and then incorporated them in another article, it held that there was no sale of the first manufactured goods because the person producing them was only using
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them for manufacture of other goods and where the ultimate product was taxable, earlier manufactured goods which formed its constituents were not liable to sales tax. But where the last end product was not liable to sales tax, section 3(6)(d) of the Act made the keeping of the earlier manufactured goods for his own use a sale and thus liable to sales tax. Likewise, where a person who manufactured the goods sold the same to another manufacturer for incorporation in another product, the device adopted under section 4 of the Act was that the sale of partly manufactured goods to another manufacturer was not liable to the charge of sales tax, leaving the final end product liable to sales tax when sold. But where the end product in which the partly manufactured goods were incorporated for some reason was not liable to sales tax, no tax on the partly manufactured goods was payable. To meet this case a limitation in the definition of "partly manufactured goods" was introduced so as to make the end product liable to tax. Thus where the end product was not liable to sales tax, the earlier manufactured goods which constituted its ingredients, ceased to be "partly manufactured goods" and became taxable as manufactured goods. 11. It is admitted position that the appellant firmmanufactured washing soap and lso dealt in soap raw materials. This is obvious from the very first sentence f the order of the Sales Tax Officer dated 15-6-1970. This is also admitted by the Sales Tax Appellate Tribunal in the very first sentence of para 2 of its order, dated 3-7-1972. 12. The appellant firm in its sales tax returns for all quarters of the assessment year 1964-65 showed the sales as under:--- Quarter ending Total SalesExempted SalesNet taxable sales Rs, Rs, Rs, 30-9-1964 73,637.77 51,343.23 22,294.54 31-12-1964 60,395.08 32,145.98 28,249.10 31-3-1965 35,513.87 12,013.38 23,500.48 30-6-1965 108 649.2163 904.71 44 744.50 278,195.93159,407.31 118,788.62 13. The Sales Tax Officer dealt with both the categories of sales separately, namely, sales of soap produced or manufactured by the appellant firm, which were chargeable under section 3(1)(a) of the Act, and the sales of raw materials which it held was liable under section 12(1) of the said Act. The sales in respect of the soap produced and manufactured by the appellant firm is not in dispute. However, the sales of raw materials are in dispute, which is the subject of this appeal. The Sales Tax Officer treated the sales of wooden boxes, sodium silicate and cotton seed oil as being exempt from sales tax. He therefore, did not charge any sales tax on the said items. As regards rosin purchased by the appellant firm from the Jallo Rosin and Therpentine Factory, which was a licensed manufacturer, and caustic soda, which was purchased by the appellant firm from Khurshid Chemical Trading Co., Akbari Mandi, Lahore, which was not a licensed manufacturer or wholesaler, the Sales Tax Officer held that all the bills produced did not show that the price was inclusive of sales tax and he therefore held that the exemption claimed could not be allowed. As regards coconut oil and tallow, he held that as the appellant had not produced any vouchers in support of the local purchases nor had been able to file certificates issued under rule 16, the exemption claimed by the assessee could not be allowed. 14. The Sales Tax Appellate Tribunal held that the sales of the four disputed raw materials were chargeable under section 3(1)(e) of the Act (which provision was not in force in the assessment year 1964-65), and that even otherwise the appellant firm was liable under section 12(1). It then held that issue hinged on the question whether the appellant had purchased the goods without
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payment of tax, or the price paid by it was inclusive of tax and since there was no evidence that the price paid was inclusive of tax, section 12(1) of the Act was clearly attracted. 15. The High Court treated the case on a totally different footing i.e, that admittedly the goods were partly manufactured goods, which in any case was not the appellant firm's position. It held that the onus was on the appellant firm to prove that the partly manufactured goods had never been purchased with the intention to utilise them in the soap production and as they had not discharged that onus, they were liable to pay tax. 16. It is clear that the sale of the soap raw materials made by the appellant firm is not chargeable to sales tax under section 3 of the Act. This is the only section under which goods produced or manufactured in Pakistan, goods imported into or exported from Pakistan, or goods sold by a licensed wholesaler are liable to sales tax. 17. The next question is whether the sales of the raw materials are liable to sales tax under section 12(1) of the Act. Section 12 is not a charging section.. It falls within the Chapter dealing with "Payment and Recovery of Tax". This section basically deals with the time for payment i.e, when the sales tax is to be paid. Initially section 12(1) only dealt with the case covered by section 3(1)(a) and (c) of the Act. In 1961 a penalty or reimbursible provision was added which made licensed manufacturers, who had either imported or purchased any partly manufactured goods without payment of sales tax and had subsequently sold such goods to persons other than licensed manufacturers or licensed wholesalers, liable for the tax which would, but for the provisions of section 4, have been paid by them in respect of such goods at the time of their importation or purchase, as the case may be, within thirty days of the end of A the month in which the goods in respect of which the tax was payable were sold. In the same year, i.e, 1961, an Explanation was also added to section 28 to permit this recovery to be made as escaped assessment. Section 4 provides that goods sold by a licensed manufacturer or a licensed wholesaler to another licensed manufacturer shall stand excluded from sales tax. Rule 16 of the Sales Tax Rules provides that where a licensed manufacturer purchases partly manufactured goods from a licensed manufacturer or a licensed wholesaler, he shall submit to the vendor a certificate to the effect that the said partly manufactured goods shall be used in, wrought into, or attached to the final product to be produced or manufactured by him, which will be taxable. The certificate is prepared in duplicate, one copy being maintained by the vendor and the other by the purchaser. This enables the purchaser to purchase the partly manufactured goods tax free by earning the exclusion provided by section 4. Where such exclusion is earned, but the licensed manufacturer does not use the partly manufactured goods in the production of the final or end product, but sells the same to a person other than a licensed manufacturer or a licensed wholesaler, section 12(1) comes to the rescue of the Government to compel the purchaser licensed manufacturer to reimburse the sales tax which, but for the provisions of section 4, he would have paid in respect of such goods. In the instant case it is an admitted position that the appellant firm neither purchased the goods as a licensed manufacturer by issuing any false certificate under rules 14 to 16 to any licensed manufacturer or wholesaler or importer that it would be using the raw materials in any manufactured goods, nor purchased the goods from a licensed manufacturer or importer, nor sold the goods to a licensed manufacturer, wholesaler or exporter. The question of the appellant firm having to be called upon to produce such certificates in respect of the sales of the raw materials therefore does not arise. It is not the case of the Department that these raw materials were actually purchased free of tax by the appellant firm on the strength of such certificates, which having been discovered, the appellant firm is liable under section 12(1). In the absence of any such finding, the appellant firm is therefore not liable to pay tax under section 12(1) of the Act. It was an admitted position before the Sales Tax Officer and the Sales Tax Appellate Tribunal that the raw materials had neither been purchased from licensed manufacturers or wholesalers nor sold to any such
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persons nor had the appellant firm issued any certificates under rules 14 to 16 to its vendors. The High Court could not have changed this admitted position when dealing with this case. See the rule laid down in Commissioner of Income Tax v. Sh. Muhammad Ismail & Co. 1986, 53 Tax 122 at 127 SC. Strangely the High Court took the case into the field of partly manufactured goods, which was not even the case of the Department. Even if there were no purchase vouchers, the case could not be brought under section 12(1) of the Act. The orders of the Department and the judgment of the High Court are therefore against law and deserve to be set aside. 18. For the foregoing reasons, this appeal is accepted, the judgment of the High Court, dated 8-1- 1979 is set aside and the sales of the appellant firm's raw materials are declared as not liable to sales tax. There shall be no order as to costs. SAAD SAOOD JAN, J.---I regret I am unable to support the judgment proposed to be delivered by my learned brother. 2. The appellant is a firm. In the fiscal year 1964-65 it was engaged in the business of manufacturing soap. It had obtained a manufacturers licence under section 8, Sales Tax Act, 1951. During the said year, its sales, apart from soap, included the following items: (1) wooden boxes, empty drums, etc.; (2) soda caustic; (3) sodium silicate; (4) rosin; (5) coconut oil; (6) tallow; and (7) cotton seed oil. It may be mentioned that items Nos.2 to 7 are used as raw materials in the preparation of soap whereas item No,1 comprised mainly packing material. The appellant claimed exemption from payment of sales-tax in respect of sale of all these items. The Sales Tax Officer rejected the claim with regard to items Nos.2,4,6 and 7, on the ground, mainly, that the appellant was unable to show that while purchasing these items it had paid any sales-tax in respect thereof. The appellant preferred an appeal before the Appellate Tribunal from the order of the Sales-tax Officer. Its case was that it had purchased the items in question from the open market and had in the course of its ordinary business sold the same in the same condition. It was, therefore, not liable to sale-tax on their sale. The learned Tribunal dismissed the appeal with the observations: "Admittedly these goods were purchased by the licensed manufacturer and they were not used in the production of taxable goods having been sold out as such and not utilised in the goods manufactured by the appellant. Again section 12(1) provides that where a licensed manufacturer purchases any partly manufactured goods without payment of sales-tax and subsequently sells such goods to a person other than a licensed manufacturer or license holder shall pay the tax leviable under this Act. Now the issue on which hinges the decision of this appeal is whether the appellant had purchased the goods without payment of sales-tax, or…
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