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Petitioner: PAKISTAN INTERNATIONAL AIRLINES CORPORATION through Secretary PIA VS Respondent: PAKISTAN through Secretary, Islamabad and 2 others
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:PAKISTAN INTERNATIONAL AIRLINES CORPORATION through Secretary PIA vs
PAKISTAN through Secretary, Islamabad and 2 others Case No.:C.M.As. Nos.4214, 4282 of 2014, C.M.A. No, 5749 in Suit No,554 of 2014 and C.M.A. No,13498 in 1543 of 2013 Date of Judgment:2014-11-14 Reported As: 2015 PTD 245 Result: Order accordingly Judgment ORDER ' MUNIB AKHTAR, J.---These suits raise an important and interesting issue in relation to the Sales Tax Act, 1990. The plaintiffs are airlines, being respectively PIA (Suit 554/2014) and Air Blue (Suit 1543/2013). Each airline imported aircraft from time to time on lease basis and the question is whether sales tax is payable on such import. In each suit there are applications for interim injunctive relief. In addition, in Suit 554/2014, there is an application seeking rejection of plaint and by consent of parties that application was treated as applying to Suit 1543/2013. The applications were heard together since the issues raised were the same as were the material facts. Since the matters were so heard I will, without intending any disrespect note the submissions of learned counsel for the respective contesting parties together. 2. Learned counsel for the plaintiffs submitted that various domestic airlines from time to time took aircraft on lease basis and these aircraft were brought into Pakistan for flight operations. Leases can be of two types: "wet leases", where the aircraft is taken on lease along with a flight crew, and "dry leases", where only the aircraft is leased and is then operated by the lessee using its own resources. Nothing however turns on this distinction for present purposes. The details of the lease agreements involved in the suits, to the extent presently relevant, can be tabulated as follows:-- Suit 554/2014 (instituted on: 1-4-2014) Sr. No.Date of Lease AgreementAircraft No.Duration
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1. 21-3-2014 2 2 months, 6 days Suit 1543/2013 (instituted on 5-12-2013) Sr. No.Date of Lease AgreementAircraft No.Duration 1. 18-5-2012 1 39 months (i,e,, 3 years 3 months) 2. 29-6-2012 1 4 years 3. 29-6-2012 1 4 years 4. 29-10-2013 2 4 months, 21 days 3. Learned counsel for the plaintiffs submitted that the lease of the aircraft was not a sale and, because the matter could not therefore come within Entry 49 of the Fourth Schedule to the Constitution, it did not come within the scope of the Sales Tax Act. Furthermore, the bringing of the aircraft into Pakistan on lease basis was not its import within the meaning of section 3 (the charging provision) and hence in any case no sales tax could be levied. Without prejudice to the foregoing it was contended that since the aircraft would leave Pakistan on the termination of the leases, they were also zero rated within the meaning of section 4 read with Entry 1(ii) of the Fifth Schedule to the Sales Tax Act. The result would therefore again be the same and hence no sales tax was payable. Referring in particular to section 2(33) of the Sales Tax Act (the definition of "supply") it was contended that the lease agreements also did not amount to a supply within the meaning of the statute. On this basis, it was contended that section 3(a) did not apply and since (it was contended) all the elements of the said clause had to be read into and treated as part of clause (b), no sales tax could be levied on the putative "import" of the aircraft. As regards the application seeking rejection of plaint, it was submitted that it was well settled that a plaint could only be rejected in entirety, and since in, part at least the suit remained unaffected by the grounds on which rejection, was sought that application ought to be dismissed. Learned counsel submitted that all the ingredients for interim relief were in place and prayed accordingly. 4. Learned counsel for the defendants opposed the grant of any interim relief. It was submitted that the plaints were hit by Order VII, Rule 11(d), C.P.C. And ought therefore to be rejected The ground taken was that the jurisdiction of the civil courts (and therefore of this Court on the original side) stood excluded and barred by reason of section 51 of the Sales Tax Act. The matter fell wholly within the four corners of the Sales Tax Act and the plaintiffs, if so minded, could avail the applicable departmental remedies. Reliance was placed on Administrator, Thal Development and others v. Ali Muhammad 2012 SCM R 730 and Rohi Ghee Industries (Pvt.) Ltd. v. Collector of Customs and others 2007 PTD 878 (SHC; SB). As regards the applications for interim relief, learned counsel contended that section 3(1)(b) was applicable to the present facts and circumstances. Its language was clear: sales tax was payable on the import of any goods. This clause operated independently of, and separately from, clause (a) and the elements of the latter could not be read into the former. Learned counsel relied strongly on a judgment of the Supreme Court, Master Foam (Pvt.) Ltd. And others v. Government of Pakistan and others PLD 2005 SC 373, 2005 PTD 1537, (2005) 92 Tax 1 to contend that "import" as used in section 3(1)(b) meant simply to bring into the country. Since admittedly the aircraft had been brought into Pakistan that meant that they had been imported within the meaning, and for purposes of, section 3(1)(b) and were liable to taxi accordingly. Various clauses from the definition section were referred to. It was also submitted that while the Sixth Schedule to the Sales Tax Act (which provides for exemptions from sales tax) had earlier contained an entry that related to aircraft (entry 43), it had been omitted in 2011. The entry now being relied upon in the Fifth Schedule (Entry 1(ii)) had no relevance since its applicability was contingent on
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there being a "supply", and section 3(1)(b) applied independently of any such. Learned counsel contended, relying on the above cited decision, that the tax contemplated by Entry 49 of the Fourth Schedule to the Constitution had been held to be a separate taxing event not contingent on any sale and therefore the application of section 3(1)(b) without reference to any "supply" was perfectly lawful. 5. During the course of submissions it appeared to me, keeping in mind that the crucial question was whether section 3(1)(b) applied or not, that since the sales tax was levied as a value added tax (VAT), the principles applicable under such a regime had also to be taken into consideration. The nature of the sales tax as a VAT was considered in some detail by a Division Bench of this Court (of which I was a member) in Pakistan Beverage Ltd. v. Large Taxpayer Unit, Karachi 2010 PTD 2673. In particular, it seemed to me that if learned counsel for the defendants were correct, and "import" (as used in section 3(1)(b)) signified the mere bringing of the goods into Pakistan, then by parity of reasoning the word "export", as used in section 4, ought to carry the meaning of simply taking the goods out of the country. But that section zero-rated goods that were exported. Since the aircraft would leave the country on the expiry of the lease agreements (i,e,, be "exported"), they would be zero-rated. The net revenue effect would therefore be zero, since in VAT mode sales tax is only payable on output tax minus input tax basis. Since it seemed that these points could have a material bearing on the outcome of the applications, I invited learned counsel to assist me accordingly. 6. Learned counsel for the plaintiffs submitted that Entry 49, being a field of legislative power, had to be construed broadly. However, while this gave the legislature a wide range of possibilities and options as to how sales tax was to be levied, once a particular mode had been adopted by enacting a sales tax law in a particular form, then the provisions thereof had to be interpreted and applied with reference to the regime actually adopted, and not with reference to Entry 49 generally. Since the present sales tax law was in VAT mode its provisions had to be interpreted and applied keeping the principles of a value added tax in mind. Referring to Pakistan Beverage Ltd. v. Large Taxpayer Unit, Karachi 2010 PTD 2673 learned counsel submitted that the Supreme Court had refused leave to appeal against the decision. It was submitted that the netting effect (output tax minus input tax) in the present case would reduce the tax liability, if any, of the plaintiffs to zero. Hence, no sales tax could be recovered from them on the "import" of the aircraft. Learned counsel also relied on East and West Steamship Co. v. Collector of Customs and others PLD 1976 SC 618 to explain the meaning of "import" and hence, concomitantly, of "export". Learned counsel referred to Federation of Pakistan v. Jamaluddin 1996 SCM R 727 and respectfully submitted that there was an apparent inconsistency between this decision and certain observations in Master Foam Ltd. And others v. Government of Pakistan and others PLD 2005 SC 373. As regards the maintainability of the suits (i,e,, with reference to the application seeking rejection of the plaints) learned counsel relief on Abbasia Cooperative Bank v. Hakeem Hafiz Muhammad Ghaus PLD 1997 SC 3; Commissioner of Income Tax v. Eli Lilly Pakistan (Pvt.) Ltd. 2009 SCM R 1279 = 2009 PTD 1392. 7. Learned counsel for the defendants submitted (without conceding) that even if the net revenue effect were zero on account of the "export" of the aircraft, the matter still had to be treated within the four corners of the Sales Tax Act. Thus, the sales tax had to be paid on the import of the aircraft and subsequently, as and when they were exported, the plaintiffs could make a suitable filing in their sales tax returns. It was emphasized that the plaintiffs could not avoid their obligation to pay the sales tax on import, even if it subsequently got adjusted (which was not conceded). It was further submitted that just as the levy of the tax on import was contingent upon the arrival of the aircraft in Pakistan the putative adjustment was contingent on export, i,e,, their exit from the country. While the former event had admittedly come about, the latter would have to be established as a matter of fact and could not be conjectured. Until and unless this event was
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factually established there could be no possibility of any zero-rating, and hence adjustment. Again, this could be done (and ought only to be done) before the relevant officer under the Sales Tax Act itself and not by way of the present suits. Learned counsel for the Department in Suit 554/2014 also filed a written synopsis. Learned counsel submitted that no case had been made out for interim relief and the suits themselves were not maintainable. It was prayed accordingly. 8. I have heard learned counsel as above, examined the record and considered the case-law. In my view, the outcome of these applications depends on an appreciation of the VAT principles, in the context of the Sales Tax Act as interpreted and applied by the Supreme Court in Master Foam (Pvt.) Ltd. And others v. Government of Pakistan and others PLD 2005 SC 373. It will be convenient to begin by referring to the VAT principles. As noted above, these have been set out in Pakistan Beverage Ltd. v. Large Taxpayer Unit, Karachi 2010 PTD 2673 (hereinafter "Pakistan Beverage"). In order to make this decision self-contained the relevant passages are reproduced below (pp. 2680- 82):- "10. The first point to keep in mind is that the Sales Tax Act as currently in force is a value added tax, or VAT. When sales tax is levied in VAT mode, it is charged at each stage in the supply chain as the goods move from the point of origin to the ultimate destination. At each stage, the sales tax is paid on the value added by the supplier concerned. This is done by taking the sales tax charged by the supplier for the goods sold by him (known as the output tax) and subtracting from it the sales tax paid by him for the goods purchased by him (known as the input tax). If the difference (i,e,, output tax minus input tax) is positive over the relevant tax period, i,e,, the output tax is more than the input tax, that means that the supplier has to pay the difference to the State. If the difference is negative (i,e,, output tax is less than input tax), then the supplier is entitled to a refund of this amount, or its adjustment in the next tax period(s). It will also be noted that in respect of each transaction, other than the first and the last, the sales tax involved has a dual characteristic. For the person making the supply (i,e,, the seller) it is his output tax. For the person acquiring the goods (i,e,, the buyer) it is his input tax. These are but two sides of the same transaction. 11. The VAT mechanism was succinctly explained in the House of Lords in Fleming (t/a Bodycraft) v. HM Revenue and Customs [2008] UKHL 2 as follows: ' one of the essential features of VAT ... Is the passing on of input tax, to be credited against output tax, along a chain of traders (for instance a supplier of components, a manufacturer, a wholesale distributor and a retailer) until the final output tax is borne by the ultimate consumer. Generally a trader's credit for input tax is obtained by deduction from his output tax, but some traders with a large turnover in zero-rated goods (such as most foodstuffs) may be "repayment traders"---that is, they regularly or occasionally pay amounts of input tax which exceed their output tax, so as to entitle them to a repayment of input tax. By contrast "payment traders" will as a rule simply deduct input tax on making their regular ... Returns...." (para 27, per Lord Walker) 13. It is of fundamental importance to keep in mind that in a VAT, the output-input adjustment, and payment of tax in terms thereof, is of the essence of the tax. Without such (or any equivalent) adjustment, the tax would simply cease to be a value added tax. In the case of the Sales Tax Act, the principle is given statutory effect in section 7. This is one of the basic provisions of the statute. 14. The second point of importance is that value added taxes can be of two kinds, and it is essential to understand the type of VAT that has been given effect to in the statute under consideration. The two types of VAT have been explained in a standard treatise in the following terms (Valve Added Tax: A Comparative Approach by Alan Schenk and Oliver Oldman, 2007): "For most countries with VATs, international trade is a significant component of their economies. A country with a VAT must define the jurisdictional reach of the tax; that is, the tax may be imposed on production within the country (an origin principle VAT), on domestic consumption (a destination principle VAT), or some combination of the two. Almost every country with a VAT relies on the
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destination principle to define the jurisdictional limits of the tax. Under a pure destination principle, imports are taxed and exports are completely free of tax (zero rated)." (pg. 180; emphasis supplied) ' The importance of zero rating in respect of exported goods has been explained by the learned authors in the following terms: "Countries that rely on the destination principle to tax international transactions typically zero rate exports of goods (regardless of the nature of the goods exported)... Because those exports will be consumed outside the taxing country. This zero rating is not a preference. The export sales are merely beyond the jurisdictional reach of the tax. The destination principle reflects the near universal understanding that in geographically assigning sales tax or VAT burdens and revenues, the country of consumption gets both...." (ibid., pp. 50-51; emphasis supplied) 15. Under the Sales Tax Act, imports are specifically (and separately) brought to tax by section 3(1) (b). Exports are specifically and expressly zero rated by section 4. It is therefore quite clear that the Sales Tax Act embodies a destination principle VAT. Since zero rating of exports is a fundamental principle of VAT levied in this manner, it is an essential element of the Sales Tax Act. 16. It will therefore be seen that since the Sales Tax Act is in the form of a destination principle VAT, there are (insofar as is presently relevant) two principles of basic application which must be kept in mind, since they form part of the fundamental structure of the statute. The first is the concept of output-input adjustment and the second is the zero rating of exports. It must be emphasized that these elements are not a concession or benefit granted to or conferred on the supplier (known as the registered person); they are integral to the whole concept of VAT under the Sales Tax Act. A failure to keep these principles in mind can result in a serious and basic misunderstanding and misinterpretation of the Act. It would also be mistaken to regard these elements simply, or merely, a part of the machinery provisions of the Act. Of course, these elements may be modified but, and this is the important point, this must be done expressly, either in the statute itself or in exercise of an express power specifically conferred by the statute.... 17. In addition to zero rated supplies, the Sales Tax Act (in line with almost all VATs) also permits exempt supplies, and the difference between the two must also be understood. The position under an exempt supply was explained in the House of Lords in Benyon and Partners v. HM Commissioners of Customs and Excise [2004] UKHL 53 in the following terms: "[A person making an exempt supply] is treated as if he was a consumer and bears the burden of the whole of the VAT which has been paid when he receives supplies of goods or services for the purposes of his business or profession. His expenses on NAT, like his other expenses, are matters which he must take into account when deciding what to charge his customers." (para 4, per Lord Hoffman; emphasis supplied) ' The position obtaining in respect of a zero rated supply (in the context of exports) is stated in Schenk and Oldman, op. Cit., as follows: "Zero rating is the mechanism under a VAT scheme by which the tax can be completely removed from a particular product or service or from a particular transaction. Under a credit-invoice VAT, a seller of a zero-rated item does not charge VAT on the sale. The sale is classified as a taxable sale subject to a zero rate. As such, the seller is entitled to recover as input credit the tax included in the cost of taxable purchases attributable to that sale." (pa 50; emphasis supplied)." 9. Sections 3 and 4 of the Sales Tax Act, as presently relevant, are as follows:-- "3. Scope of tax.---(1) Subject to the provisions of this Act, there shall be charged, levied and paid a tax known as sales tax at the rate of seventeen per cent of the value of-- (a) taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and (b) goods imported into Pakistan...."
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(The rate of the tax is as presently applicable. It was slightly lower in respect of some of the lease agreements.) "4. Zero rating,- Notwithstanding the provisions of section 3, the following goods shall be charged to tax at the rate of zero per cent:-- (a) goods exported .... 10. This brings me to what is in many respects the most crucial step in the analysis, a detailed consideration of Master Foam (Pvt.) Ltd. And others v. Government of Pakistan and others PLD 2005 SC 373 (herein after "Master Foam"). A number of connected appeals were disposed of by this judgment. The appellants had their manufacturing units in Azad Jammu and Kashmir (AJK), which, as noted by the Supreme Court (pg. 379), is not part of Pakistan. For their operations, the appellants had to bring in raw materials from abroad, which could only reach the units in AJK by being imported through Pakistan. Specifically, the goods arrived at Karachi and were then sent onwards to AJK territory. The Pakistani authorities sought to tax the goods at Karachi on the basis of section 3(1)(b). The appellants argued that such tax was not leviable since the goods were not meant for consumption, use or sale in Pakistan, but were merely in transit through the country for ultimate use in AJK. It was contended that the tax contemplated by Entry 49 of the Fourth Schedule to the Constitution could only be levied if the goods were intended for use, sale or consumption within Pakistan and not otherwise. It was also contended that the mere bringing of the goods into Pakistan was not a taxable event since that, for purposes of the Sales Tax Act, required a sale or "supply". There was also no "import" into Pakistan since that required something more than just the entry of the goods into the country. There had to be some nexus or connection of the goods with Pakistan and mere transit was insufficient. It was also submitted that AJK had adopted the Sales Tax Act, 1990 as an Act applicable in that territory, and exempted the appellants' production from such tax. (The notification issued by the AJK Government is reproduced at pg. 378.) It was contended that the levy of sales tax on import into Pakistan would effectively nullify the exemption. The attempted levy by the Pakistani authorities was challenged in the Lahore High Court, which dismissed the petitions through judgments of various dates, and the matter went to the Supreme Court. 11. The Supreme Court dismissed the appeals, comprehensively rejecting the appellants' case. It was held that "import" as used in section 3(1)(b) carried its natural and ordinary meaning of simply goods being brought into Pakistan. The Court considered a number of decisions, and consulted various dictionaries, to examine what was meant by "import". One of the decisions so considered, and approved, was East and West Steamship Co. v. Collector of Customs and others PLD 1976 SC 618, which as noted above has been relied upon before me by learned counsel for the plaintiffs. The Supreme Court observed (at para 26, pg. 391) that "import" had there been given "its ordinary and natural meaning" in the context of the Sea Customs Act, 1878. It was concluded as follows (pg. 392):- "27. From above it is clear that right from 1963 till date the courts in Pakistan have consistently given the word 'import' its natural and ordinary meaning of 'bringing into' the country and have rejected the imposition of artificial constraints on it, such as those imposed by the American doctrine of original package. It being so, we are of the view that there is no scope that the word 'import' should be given a different meaning that what appears in section 3(1)(b) of the Act of 1990, especially when there is nothing in the statute to indicate that different meaning was intended by the Legislature. It appears that Legislature, by not defining the word 'import' in the Act of 1990 desired the interpretation of said word in accordance with the following principle: - ' ..When a Legislature uses in a statute a legal term, which has received a judicial interpretation, it is to be presumed that the term has been used in the sense in which it has been judicially interpreted, unless a contrary intention appears from the statute."
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28. Thus the goods were imported into Pakistan by the appellants when they entered the territory of Pakistan and became liable to taxation accordingly. It is immaterial that ultimately they were to be transported to AJK. This is for the reason that import into Pakistan is a distinct taxable even independent of any event following thereafter." ' As regards Entry 49 of the Fourth Schedule to the Constitution, it was observed as follows (pg. 392):-- "29. Close scrutiny of Entry 49 and other laws referred to above reveal that acceptance of appellants' argument that Entry 49 authorizes tax on import only when it is followed by sale or purchase in Pakistan, will render the words 'imported, exported, produced, manufactured or consumed' redundant and also frustrate the whole purpose of substituting present entry for the original Entry 49, and the amendment inconsequential. If sale and purchase alone were taxable events, as argued by the learned counsel for the appellants, then there was no point in adding the words 'imported, exported, produced, manufactured or consumed'. Clearly, no redundancy can be attributed to the Legislature and on this ground the argument of the appellants is repelled. It is also to be noted that, if above argument of the appellants is accepted, a situation would arise where import into Pakistan may not be taxed at all. Besides, while examining the validity of a statute, the principle is that there' is a presumption of constitutionality of a statute and that every explanation in favour of a statute must be found. Keeping in view the complexity of economic problems, great latitude is shown in favour…
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