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Petitioner: DEWAN SALMAN FIBRE LTD. and others VS Respondent: FEDERATION OF PAKISTAN, through JUDGMENT
Court Name: Islamabad High Court Judge(s): Noor-Ul-Haq N. Qureshi, Shaukat Aziz Siddiqui Title:DEWAN SALMAN FIBRE LTD. and others vs FEDERATION OF PAKISTAN, through
JUDGMENT
Reported As: 2015 PTD 2304 Result: Appeal allowed Judgment JUDGMENT SHAUKAT AZIZ SIDDIQUI, J.---With this single order we intend to deicide the above titled I.C.A. No,82 of 1997, Writ Petition No,287/1996 and Writ Petition No,1105/1996 as common questions of facts and law are involved in the appeal and writ petitions. 2. Precisely, the necessary facts for the decision of the lis before the court are that the petitioner Dewan Suleman Fibre Limited Company (hereinafter to be referred as DSF) had filed the Writ Petition No,1554/1995 against the respondents alleging that the Federal Government of Pakistan in order to encourage the growth of underdeveloped areas of the country and for the dispersal of industrial undertakings, away from the major urban centers, designed national policy and granted certain incentives in the form of tax exemptions in respect of specified areas. The said exemptions were introduced for national and multinational enterprises to avail the benefit of fiscal incentives by establishing the industrial concerns in the far flung and underdeveloped areas of the country. As per the version of the appellant one such area was Deh Dingi, District Haripur in the NWFP presently KPK and the Government encouraged the establishment of industries in the said area through various fiscal incentives including total exemption from the payment of Sales Tax on finished products and for this purpose it issued S.R.O. No 580(1)/91 dated 27-6-1991 and S.R.O. No 561(1)/94 dated 9-6-1994. That according to the said SROs all goods produced/manufactured by such industries to be established in KPK province up to 30th June 1996 would be exempted from the levy of sales tax payable under the Sales Tax Act for a period of five years from the date of production from the industry; that the appellant set up an industry/undertaking for manufacture of Polyester staple fiber at Haripur NWFP; that Unit No, 1 was set up as joint venture between Mitsubishi
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Corporation of Japan, Sam Yang Company of Korea and DSF Group of Pakistan representing investment of US$ 100 Mn and it commenced its production in Jan 1992 and accordingly this unit by virtue of S.R.O. No,580(I)/91 was eligible for exemption from the payment of sales tax till December 1996 at the least. 3. That like-wise Unit No, 2 of the petitioner company was established as joint venture amongst the aforementioned companies at similar cost and it commenced production on 14 June 1995 and thereafter, it was eligible for sales tax exemption on the basis of supra SRO read with the Protection of Economic Reforms Act, 1992 least till 14-6-2000. Appellant challenged the legality of S.R.O. No, 477(1)/1995 dated 14-6-1995 by virtue of which the respondents imposed the Central Excise Duty @ 5% ad volerum on polyester Stable Fiber manufactured by appellant company and through S.R.O. 515(I)/95 dated 14-6-1995 it reduced the sales tax from 15% to 10% for extraneous reasons as the appellant were absolutely exempted from the payment of sales tax and reducing the quantum of sales tax was not any benefit to the appellant, whereas appellant was bound-down to pay the Central Excise Duty @ 5%. Through Writ Petition No, 287/1996 petitioner who is the appellant in ICA has narrated the same facts and has disputed the legality of S.R.O. No, 482(1)/92 dated 14-5-1992 on the ground that through the disputed SRO the respondents reduced the target date by two years i,e, from 30-6- 1996 it was curtailed to 30-6-1994 for the establishment of the industrial units in the specific area to claim the absolute exemption from the sales tax. Petitioner claims that respondents cannot subsequently curtail the target date and fix it as 30-6-1994. Through this writ petition the appellant has prayed that the disputed SRO be declared as null and void and respondents be directed to refund the amounts which they have received under the said SRO. 5. Through Writ Petition No, 1105/1996 the petitioner/appellant have challenged the legality of the amendments made in clauses 26 and 42 of Section of 2 and Clause IV of Subsection (2) of Section 7 of Sales Tax Act on the ground that these amendments have been introduced to deprive the petitioner from exemption of sales tax with mala fide intentions and again these amendments are against the mandate of Section 6 of the Protection of Economic Reforms Act, 1992. It is further maintained that the above referred amendments are prospective and cannot be made to affect the rights of exemption of the petitioner retrospectively. Petitioner has alleged that before these amendments Section 7(2)(iv) read as follows:-- 7(2) the registered person shall not be entitled to conduct input tax from output tax unless:- (iv) in case of purchase of goods from a registered person making and exempted supply, he holds and invoice issued by such person" And after amendments it reads as follows;- "7(2) (iv) In case of tax supplied of goods by registered importer the distributor or whole seller not charging output tax on supply of these goods to other registered persons. The latter holds replacement invoice indicating the amount of paid at the stage of import or supply by manufacturer". The petitioner has further alleged that the subject of the replacement invoice has been introduced through clause 26 of Section 2 which reads as under. "Replacement of invoice means a document required to be issued by registered importer, distributor, and whole seller not charging output tax supplies made by them" Petitioner further alleged that the tax supplies has been introduced through the amendment in clause 42 which reads as under:-- "Tax supply means a supply of goods by registered importers, distributor or whole seller on which tax has been paid at the stage of import or supply by manufacturer and no further out put tax is payable throughout at the time of supply thereof by such importer distributor or whole seller."
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6. Petitioner has challenged the above referred amendments on the ground that the investment incentives/exemption, granted to the petitioner was time bound as the exemption of sales tax for Unit No, 1 was up to December 1996 and for Unit No, 2 it was up to 14-6-2000; that petitioner had made a huge investment and incurred extra huge expenses for putting out the plant in the area of Village Dingi District Haripur KPK on the basis of investment incentives as promised and assured by the State of Pakistan. That this investment incentive/ exemption had become the property of the petitioner and no law can be made to deprive the petitioner of his property right under the Constitution save in accordance with law; that Section 6 of the Protection of the Economic Reform Act, 1992 provides that fiscal incentives for investment provided by the Government through statutory orders enlisted in the schedule for the terms specified therein and shall not be altered to the disadvantage of investors. It is further alleged by the petitioner that the disputed amendments have been made against the guarantees provided in the Section 6 of the Protection of the Economic Reform Act, 1992. 7. Learned Single Judge of Lahore High Court, Rawalpindi Bench, dismissed the said writ petition of appellant through its order dated 29-5-1996 and the appellants have challenged the said order through the ICA under section 3 of the Law Reforms Ordinance, 1972 on the grounds that the respondents were not authorized to do that indirectly which they were not authorized to do directly; that by virtue of S.R.O. No, 580(1)/91 dated 27-6-1991 and S.R.O. 561(I)/94 dated 9-6-1994, the appellant was to enjoy the total exemption of the payment of sales tax for a period of five years from the date of the start of production from his industrial units established in the specified area. The learned counsel for the appellant has argued that the rival industrial groups were devising plans to deprive the appellant from the exemption of sales tax and for this purpose they managed the reduction of sales tax from 15% to 10% and supplemented the said reduction in the sales tax by imposing the Central Excise Duty @ 5%. This imposition of 5% of the Central Excise Duty did not affect the industrial concerns who had already been paying the sales tax @ 15% and they continued to pay the same Duty with the imposition of 5% Central Excise Duty but as the petitioner was absolutely exempted from the payment of sales tax he was forced to pay the 5% Central Excise Duty. The learned counsel has further argued that as per the principle of promissory estoppel the respondents were not authorized to curtail the exemption of 5 years and the reduction of sales tax to 10% and the imposition of 5% Central Excise Duty was result of mala fide and in violation of the mandate of the Protection of Economic Reform Act, 1992; that the disputed S.R.O. Dated 14-6-1995 are in direct conflict with the Section 6 of the Protection of Economic Reform Act, 1992. These arguments were supplemented with case-laws reported as "1998 SCMR 1404", "1992 SCMR 1652". "PLD 1997 SC 582", "2009 PTD 1902", "2005 PTD 2505", "1999 MLD 2994", "2002 PTD 2874", "2000 SCMR 814", "1999 SCMR 1072", "PLD 1998 SC 64", "2001 PTD 1", "2011 SCMR 551", "PLD 2011 SC 811", "PLD 1968 SC 313" "2011 CLC 130", "PLD 2011 Karachi 400" and "2010 CLD 988". 8. Respondents through Para-wise comments have denied the claim of the petitioner/appellant and prayed for dismissal of the ICA and the writ petitions. Respondents have alleged that the notification through which Central Excise Duty has been enforced has caused no loss to the petitioner, that the said duty is indirect tax and is ultimately passed on to the consumer, therefore, the profitability of the petitioner enjoyed by them as result of concession, remained unchanged. That even the SRO under which the impugned notification was issued are legislative in nature and in the exercise of the legislative powers the question of mala fide, penalty or motive becomes irrelevant; that the subject of the exemption with reference to taxation pre-supposes a liability, therefore the exemption always constitute a temporary immunity from the liability and non- exercise by the respondents of their statutory functions at given time does not create any vested right to the petitioner to be exempted from the payment of tax ipso-facto when such tax are enforced at later stage or exemption is withdrawn; that even if it is said that exemption was
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granted by the Federal Government even then its withdrawal by legislative through Finance sector is legal but Federal Executive authority which enjoys a delegated legislative power within the framework of Sales Tax Act cannot fetter, surrender, limit or curtail the Federal Legislative powers as such; that no harm has been done to the petitioner through the impugned notification or the amendments in the Sales Tax Act and that the instant petition of the petitioner/appellant is liable to be dismissed. 9. Learned counsel for respondents has contended that petitioner/ appellant claimed that his factory is situated in the village Dingo District Haripur and it stands exempted from the payment of sales Tax on the finished products but the petitioner cannot claim that it has concealed the project depending upon the presentation of government in shape of exemption on raw material. The learned counsel argued that the petitioner company was incorporated in 1989 and at that time S.R.O. 529(1)/88 dated 26-6-1988 was in existence. That the petitioner could not have concealed that another S.R.O. 580(I)/91 dated 27-6-1991 would be issued. That the petitioner company had not envisaged production from Unit No, 1, till May, 1992 and till had not acted on S.R.O. 529(I)/88 which was applicable to the industrial setup by 30-6-1991, therefore, the petitioner cannot take advantage of, it. That the production in Unit No. 1 commenced in the year 1990 i.e. before the issuance of S.R.O. 580(1)/91 and therefore it did not deserve the exemption granted through the said notification. That in fact under the said notification the stipulated exemption from payment of sale tax was at the time of clearance of finished goods (output tax) for a period of five, years after the unit was setup. The learned counsel has further argued that the learned single Judge in chamber had rightly dismissed the Writ petition of the appellant and the said order does not call for any interference. The learned counsel has further argued that the Writ Petition No. 287/96 whereby the S.R.O. 482(1)/92 dated 14-5-1992 has been challenged is at all not maintainable as the said S.R.O. has been issued in accordance with the authority envisaged in the respondents. The learned counsel has further argued that the petitioner has no locus standi to challenge the amendments made in section 7 and section 2 of the Sales Tax Act, as the Act provides that inputs are to be claimed only by those Units who were' not enjoying exemptions, therefore, the petitioner cannot claim the benefit of getting adjustments of the input tax without payment of output tax. The learned counsel has prayed that the appeal along with both the writ petitions should be dismissed. Learned counsel has supplemented his arguments with the case-law 1982 SCMR 833, PLD 1991 (SC) 546, 1999 SCMR 412 and 1997 SCMR 641. Arguments heard record perused. 10. DSF is a public limited company which is listed on the Stock Exchange. It represents a joint venture between the Dewan Group of Pakistan, Mistubishi Corporation of Japan and Sam Yang Company limited of Korea. This collaboration led to the setting up of the DSF which constructed a major polyester fibre producing plant, located in Deh Dingi District Haripur Frontier Province. It represents a major trilateral investment on the part of all three participants. The project was conceived in 1990 when a joint venture agreement was executed on February 14, 1990. It intended to utilize the latest technology which was to be introduced into the country. The project cost was US $ 100 Mn each for both Units. At the time the project was conceived a sales tax exemption had been granted to all industries set up in NWFP vide S.R.O. 529(1)/88 dated 26-6-1988. The exemption was originally available for all projects set up by June 30, 1991 but by means of S.R.O. 500(1)/91 dated 14- 6-1993 was subsequently extended to June 30,1996. The project came into production in December 1991. 11.A radical change in relation to the fiscal duty structure, was introduced by means of. S.R.O. 482(1)/92 dated 14-5-1992 at the time of the 1992 budget in terms of which 12.5 percent sales tax was imposed on the import of major raw materials (i.e. PTA and MEG) for the manufacture of polyester staple fibre. The impact of this imposition fell principally on DSF. The reason arises out of
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the fact that sales tax already existed on the finished product (i.e. polyester Staple Fibre) in relation to the other major manufacturers who are not located in economically under developed areas like NWFP. The levy of sales tax is structured in such a manner that any producer who pays sales tax on the import of raw materials is entitled to a corresponding adjustment or deduction at the time he sells the finished product. Since DSF is not liable to sales tax on the finished product because of the exemption notification, it necessarily follows that no question of an adjustment arises in its case and in consequence it is burdened with the additional duty. The net result therefore is that the exemption granted to it earlier stood diluted to a corresponding extent of about 50%. It is this dilution or partial withdrawal which led directly to the present dispute. 12. DSF selected the far off area of Deh Dingi a rural area of NWFP for the project in the expectation of utilizing the various fiscal benefits provided by the Government of Pakistan. These included an income tax holiday, custom duty exemption as well as the disputed exemption of sales tax at the rate of 12.5%. The feasibility proposal for the project states at page 13 that Central Excise Duty and other taxes are shown as zero. The decision to locate the project in Deh Dingi involved a heavy additional capital cost. It is obvious that in order to attract a high level of managerial expertise for a project based in a comparatively remote rural area, extra facilities have to be provided for this purpose. These have involved the construction of executive and staff families accommodation, the construction of a primary school, a shopping center and a mosque, in addition to the factory building, a bank terminal at Deh Dingi was also constructed in addition to a power house. It appears that a power house is required in order to obtain a consistent supply of power. The lack of an infrastructure meant that even roads had to be constructed by DSF. A break of the additional costs, incurred has been provided millions of rupees. Apart from the extra capital cost there is an additional recurring cost. Computed on an annual basis DSF estimates, that the transportation of the raw materials involve a recurring cost of Rs. 54 Million per annum, the transpiration of the finished goods Rs. 12.5 Million per annum and the various additional running expenses those for school as well as hospital construction by DSF. The concern and anxiety of the DSF is that after having made this massive investment both initially as well as on recurring basis, the decision of the CBR to abruptly withdraw the benefit of the exemption in part, has had a major impact on it. But for the exemption granted, there was no reason for DSF to have located its project in such a remote area. At this later stage within the span of few months after the project had gone into operation instead of the benefit of the exemption being made available for five years it was abruptly curtailed by the issuance of the impugned notification. 13.The concern and anxiety expressed by DSF have been supported by the Japanese Government. DSF has placed reliance on a letter dated October 18th 1992 sent by the Ambassador of Japan to the CBR expressing his concern lest this problem detract between our two countries. The letter concludes by expressing the hope that a satisfactory solution would be found to the problem which would encourage the prospective investors planning to invest in Pakistan in the near future. The Japan Chamber of Commerce and Industry is also on record expressing its deep anxiety. It has written a letter dated June 8th, 1992 to the Government of Pakistan which states as this joint venture project is regarded as one of the most ideal and monumental investment from Japan to Pakistan and all Japanese potential investor are carefully watching its progress, therefore Japan Chamber of Commerce and Industry is showing grave concern to this matter and'asking him to clarify if this withdrawal of major incentives mean change of the investment policy of the Government of Pakistan. The letter goes on to state that success of this venture will have a great impact on the future direct investment from Japan. It expresses the concern that this kind of inconsistency of the policy of the Government of Pakistan will damage credibility of its policy and ruin all the efforts made to induce foreign investment. 14.We now turn to the stand of the CBR. We have dilated at length on the merits of the
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submissions. We have also noted that the Central Board of Revenue is essentially a revenue collecting agency. Its central function is to collect revenues for the public exchequer and it is understandable that any proposal which leads to an enhancement in taxes should be viewed by it in a favorable light. Although no doubt, the CBR is required to be fair in the framing of fiscal policy it is clear that a perception of its predominant function is such as will not necessarily lead, in every case, to a structuring of fiscal levies on broader policy considerations. It is under a statutory mandate to advise the Government on the structure of tariff and duties. In the present case it formulated its views and forwarded them to the Ministry of Finance which accepted them at least in relation to the levy of duty on the raw materials. Thereafter for unexplained reasons the CBR adopted a completely different stand. We do not intend by so observing, to criticize the CBR. It may be that there were valid reasons for its stand. It is precisely for this reason that it is advisable for different government departments to co-ordinate their functioning. Orderly governmental procedures do require that decisions taken by responsible and highly placed functionaries of the state should not be disregarded without compelling reasons. No such reasons have been brought to our notice in the present case. 15.We now turn to the legal issues arising in the case. The first question of which our opinion has been sought originally reads as under:-- "Whether the fiscal incentives provided through sales tax on fibre precluded imposition of Sales Tax on the import of its raw material within the meaning of Protection of Economic Reform Act, 1992. This was subsequently substituted by following question;- Whether the Central Board of Revenue was justified in law or in equity in imposing the Sales tax on the import of raw material by the company? As is obvious the scope of the question has been expanded in two directions firstly it is no longer tied only to the ambit of the Protection of Economic Reform Act, 1992 and secondly it also extends to consideration of equity as well as law. 16.Although the importance and significance of the Protection of Economic Reform Act, 1992 has diminished by reason of the amended question, it still requires consideration. The Act, as the name indicates, primarily relates to the protection, of various economic reforms. The concept of economic reforms is elucidated in section 2(b) as meaning economic policies and program, laws and regulations announced promulgated and implemented by the Government on or after 7th November, 1990 relating to privatization of public sector enterprises and nationalized banks, promotion of savings and investments, introduction of fiscal incentives for industrialization and deregulation of investment of banking, finance, exchange and payments systems and holding and transfers of currencies. Section 3 of the Act states that it shall have effect notwithstanding anything contained in any other law for the time being in force. Sections 4 and 5 relates to foreign currency accounts. Section 7 relates to companies which have been privatized; Section 8 relates to the protection of foreign and Pakistan investors and Section 9 'relates to secrecy of banking transactions. The two sections which may be perused are sections 6 and 10 which reproduced below:-- Section 6. ---Protection o fiscal incentives or setting industries. The fiscal incentives for investment provided by the Government through the statutory orders listed in the schedule or otherwise notified shall continue in force for the terms specified therein and shall not be altered to the disadvantage of the investors. Section 10. ---Protection of Financial obligations. All financial obligations incurred, including any instrument, or any financial contractual commitment made by or on behalf of the Government shall continue and remain in force and shall not be altered to the disadvantage of the beneficiaries. 17. It has been contended before us that the definition of economic reforms relates exclusively to
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those reforms which were carried out after 7th November, 1990 and accordingly the Act has no applicability whatsoever in the present case. The arguments is misconceived since admittedly S.R.O. No.500(I)/91 dated 22-6-1991 which is the notification under which the exemption was granted to DSF was issued after 7th of November 1990. It is true that original notification bearing S.R.O. No. 529(1)/88 was issued in 1988 but since the exemption in question was granted to DSF under the latter and not the earlier notification. In the case of Al-Samrez Enterprises (1986 SCMR 1917) the Supreme Court dealt with a case in which an importer had imported a consignment of goods on the basis of an exemption notification which was in force on the date on which he entered into a contract with his foreign suppliers. When the consignment arrived at Karachi, the exemption had been withdrawn. Under Section 30 of the Custom Act, 1969 it has been clearly provided that the rate of duty applicable will be that prevailing on the date on which the bill of entry is filled by an importer. Accordingly, the Customs Department refused to allow the importer the benefit of the exemption. The importer challenged this…
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