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Petitioner: Pakistan through Chairman F.B.R. and others VS Respondent: Hazrat Hussain and others
Court Name: Supreme Court of Pakistan Judge(s): Ijaz-ul-Ahsan, Mian Saqib Nisar, Umar Ata Bandial Title: Pakistan through Chairman F.B.R. and others vs Hazrat Hussain and others Case No.:Civil Appeals No, 633 to 637 of 2007, 130 to 145 of 2009, 68-70 of 2011, 1229 of
JUDGMENT
Reported As: 2018 P.C.T.L.R. 389, 2018 P.S.C. 802 Result: Appeal dismissed Judgment JUDGMENT MIAN SAQIB NISAR, C.J. All these appeals with leave of the Court vide orders dated 15.1.2007 and 27.1.2009 involve akin questions of law, thus are being disposed of together. The facts relating to the present controversy can be set out within a brief compass by making reference to one appeal. The respondent No 1 in Civil Appeal No, 983/2015 (the respondent) is carrying on the business of operating a steel furnace and re-rolling mill. Pursuant to the said business it imports iron and steel remeltable scrap from time to time as, also machinery and plant. The importation takes place through the port of Karachi. At the time of importation, the respondent files the appropriate goods declaration alongwith each consignment (Goods Declaration). In terms thereof, the respondent claims an exemption in relation to both advance income tax as well as sales tax on the ground that its plant is located in Dargai, Malakand Agehcy which is part of the Provincially Administered Tribal Areas (PATA). The respondent does not dispute its liability to pay Customs duty and thus there is no controversy regarding the same. The Goods Declarations filed in the present case clearly show that the customs duty has been duly paid. However, insofar as the advance income tax and sales tax are concerned, the same are strongly contested on the anvil of Article 247(3) of the Constitution of the Islamic Republic of Pakistan (the Constitution) which is reproduced below:--- "247. (3) No Act of Majlis-e-Shoora (Parliament) shall apply to any Federally Administered Tribal Area or to any part thereof, unless the President so directs, and no Act of Majlis-e-Shoora (Parliament) or a Provincial Assembly shall apply to a Provincially Administered Tribal Area, or to
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any part thereof, unless the Governor of the Province in which the Tribal Area is situated, with the approval of the President, so directs; and in giving such a direction with respect to any law, the President or, as the case may be, the Governor, may direct that the law shall, in its application to a Tribal Area, or to a specified part thereof, have effect subject to such exceptions and modifications as may be specified in the direction." 2. The Customs Department, however, refused to accede to the request of the respondent. Its stance was that both advance income tax and sales tax were payable under the Customs Act, 1969 (Customs Act) and accordingly the respondent, having no other effective, efficacious and expeditious remedy available to it, invoked the jurisdiction of the learned Peshawar High Court. The petition filed by it was ultimately succeeded, as further explained hereinafter. The Chief Commissioner, Inland Revenue (appellant) challenged this decision by filing petition for leave to appeal before this Court, which (leave to appeal) was granted and pursuant thereto the case has come up before us for final decision. 3. The case of the appellant is best set out in terms of the para-wise comments filed by it before this Court and the opening ground contains the following passage:-- 'That the petitioner (i,e, the Respondent herein) cannot claim territorial/Constitutional exemption of sales tax on imports of raw materials/machinery as the activity "taxable imports" is taking place in the area to which tax laws are fully applicable irrespective of its transportation to taxable or non- taxable areas. Besides, the ruling of the Supreme Court of Pakistan in the judgment passed in the case of Master Foam (Pvt.) Ltd. as well as the ratio decided in Review Order dated 5.3.2007 in the case of Gul Cooking Oil this Honourable Court has also settled the matter in question, therefore, re- agitating the same at this stage and before this Honourable Court is extremely unwarranted. Consequently, the demand of sales tax at import stage is based upon the interpretation of apex Court in the respective and concurrent decisions and the constitution as well. The charging and collection of sales tax on imports is not discriminatory or confiscatory as the petitioner had to add the element of sales tax being an indirect levy in the cost of finished products on its sales depending upon the market conditions." 4. As against the above argument the contention of the respondent is that the immunity granted to it under Article 247(3) of the Constitution cannot be taken away by the Department. This is the critical area of dispute between the parties which we have to decide. 5. We begin with the admitted position that the Customs Act applies in the matter. This is because, irrespective of the question as to whether the Customs Act applies to PATA or not, there can be no doubt about the fact that it applies in Karachi Which is the port of the importation of the goods. The above being the admitted position we now have to determine on what basis income tax and sales tax can be demanded from the respondent under the Customs Act. The applicable Section in this regard of the Income Tax Ordinance, 2001 (Income Tax Ordinance) is Section 148 and the relevant provisions thereof are reproduced below:--- "148. Imports (1) The Collector of Customs shall collect Advance Tax from every importer of goods on the value of the goods at the rates specified in Part-II of the First Schedule. (5) Advance Tax shall be collected in the same manner and at the same time as the customs-duty payable in respect of import or, if the goods are exempt from customs duty, at the time customs- duty would be payable if the goods were dutiable." The above provisions prima facie create the jurisdiction entitling the Customs Department to demand advance income tax from the importers. 6. Sub-section (1) thereof makes it clear beyond any iota of doubt that what is being collected by the Collector of Customs is advance income tax and not customs duty. This is a point of critical importance. Sub-section ibid further clarifies that the role of the Customs Department is essentially that of a collecting agency. It has been statutorily conferred the power to collect advance income
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tax for and on behalf of the Income Tax Department. It is here that the appellant comes up against a constitutional barrier. It is not denied that the income tax law does not apply for, and in relation to PATA. Section 148 is an integral part of the Income Tax Ordinance. Since the Income Tax Ordinance does not apply in toto it necessarily follows that Section 148 thereof will also not apply for, and in relation to, PATA. Thus, ex facie, the Department lacks the jurisdiction to collect advance income tax under the said section. 7. We now turn to the issue of demand for sales tax. The applicable provision of the. Sales Tax Act,. 1990 (Sales Tax Act) is Section 3 and the relevant part thereof is reproduced below:--- "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 17% 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; (b) goods imported into Pakistan." Section 3 (ibid) has to be read in juxtaposition with Section 6 of the Sales Tax Act and the relevant part thereof is reproduced below:---- "6. Time and manner of payment. (1) The tax in respect of goods imported into Pakistan shall be charged and paid in the same manner and at the same time as if it were a duty of customs payable under the Customs Act, 1969 and the provisions of the said Act including Section 31A thereof, shall, so far as they relate to collection, payment and enforcement including recovery of tax under this Act on such goods where no specific provision exists in this Act, apply." It may be observed that this Section is a parallel Section to the provisions contained in Section 148(1) and (5) of the Income Tax Ordinance. What is important to note here, once again, is that what has to be collected under Section 3(1)(b) is not customs duty; it is, and throughout remains, sales tax which is leviable on the imports of goods into Pakistan. it is merely that the machinery provisions of the Customs Act, insofar as they relate to the payment and recovery of tax under the said Act, have been made applicable. 8. Thus, in brief, both the Income Tax Ordinance and the Sales Tax Act contain provisions which enable the machinery of the Customs Act to be made applicable and also create jurisdiction. in the Collector of Customs for the purpose of recovery of both advance income tax as well as sales tax. Both laws are clear beyond any dispute on the point that by so doing what is being collected is not customs duty but respectively income tax and sales tax. It follows that by a parallel set of reasoning, as has been set out hereinabove, in relation to income tax, that the provisions of the Sales Tax Act will also not justify the levy and collection of sales tax on goods meant and intended for PATA. There is no dispute, as pointed out above that neither the Sales Tax Act nor the Income Tax Ordinance applies in relation thereto. 9. The above is the Constitutional and legal background of the matter. The principle is clear, beyond any doubt. However, what has still to be resolved is the modality in terms of which this principle is to be applied. On the one hand the appellant claims that since the goods are being imported through Karachi, they are entitled to recover not merely the customs duty but also the income tax and the sales tax, since it is not known as to whether the goods will actually be delivered to PATA and processed and sold therein or not. That is a pure question of fact. No interpretation of law is involved therein. The mere fact that a question of fact arises will not create a non-existent jurisdiction in the Revenue. As against this the stance of the respondent is that it is, as a matter of fact, transporting the imported scrap from Karachi to PATA, utilizing it therein for the purposes of manufacture of the goods made by it and thereafter the same are being sold in PATA. 10. We have to resolve this dilemma. While the entitlement of the respondent is clear, on the Constitutional plane, there is also no doubt about the fact that the Department is entitled to conduct an investigation on the factual plane to determine whether the goods are indeed
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intended for PATA and whether thereafter these are processed and sold also in PATA. Bearing in mind the conflicting stands of the parties, the learned Peshawar High Court, by means of the impugned judgment, set out a mechanism for resolving the factual dispute. In essence, it provided that the respondent shall initially prepare and deposit a post-dated cheque in favour of the Department. Thereafter, on receipt of the cheque the Department releases the goods without insisting on payment of the claimed amnesty of tax. An elaborate procedure of checking and verification is carried out. This is illustrated by a set of documents which has been made part of the record and is available in CMA No, 752 of 2015. The basic document is a letter addressed by the respondent to the Commissioner Inland Revenue bearing the heading "Request for issuance of consumption certificate." The letter sets out the details of the raw materials which have been imported for utilization in the factory located in PATA. It ends with a request to the Commissioner Inland Revenue that he should verify the arrival of the above consignment at the factory, as well as its consumption therein, and issue consumption certificates. Attached to the letter are a set of documents. These include the Goods Declaration filed with the Customs Department, the documents showing the production and consumption of material, the stock report of raw material, the stock report of finished goods, the statement of production and the statement of sale. The list of dealers is also shown to whom the sales have been made. Then follow up details in relation to the above-mentioned transactions. The documents include the names of the firms to which the goods are sold and the amount recovered therefrom. There is also a date-wise statement showing the opening balance of raw materials, a receipt of raw material including the transportation documents, and the gate passes alongwith the quantities. Further particulars which are contained therein are the waste percentage, the quantity of goods in process, the quantity of material actually consumed, the quantity of goods produced/manufactured with the number of packages and the closing balance. The final document is a certificate issued by the Commissioner of Inland Revenue in response to the above-mentioned documents which have been received by him and duly processed. It states that the arrival and consumption of the material was verified from the record by the audit staff of the Department, .who has confirmed that the goods have arrived at the factory premises and have been processed therein. It is further certified that the imported goods have been consumed in the production of finished goods in the premises of the respondent in Dargai, Malakand Agency. This, consumption certificate is, it is important to note, only issued after the sale has taken place to the buyers whose names and details of sales have been set out in the accompanying documents, which we have already referred to hereinabove. It is a significant fact of the utmost importance that throughout the period in which the respondent was carrying on business, this process and procedure was carried out smoothly and at no point of time, including up until now, was there any discrepancy found in the documents and, indeed, it, is not the case of the Commissioner Inland Revenue, that the raw materials imported have not been consumed at the factory at PATA and sold again in PATA, as evidenced by the documentation referred to hereinabove. 11. In the above circumstances, we are at a loss to understand why and how, on the factual plane, the present appeal has been filed. The learned counsel appearing on behalf of the respondent has raised a strong objection in relation thereto. On the face of it we are inclined to agree with him. It is to be noted that appeals should not be filed as a matter of routine or because a decision has been rendered against the Department. Decisions should be taken on a reasonable basis. It is not advisable for government departments to waste public time and money by filing appeals routinely. In the present case we have been informed that the :respondent has suffered substantial financial loss since the factory was shut down for over a year as a consequence of the ex parte stay order obtained by the Department. This must have had serious consequences for the workers who lost gainful employment. The position would have been different if the respondent had been engaged
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in, an illegal activity but that is not the case pleaded by the Department. The net result is that citizens of Pakistan have suffered substantial financial losses with no corresponding benefit to the Revenue Department. This can only be described as an undesirable status, of. affairs. When we raised these questions the only response given on, behalf of the, Department was , that the legal issues were, involved especially those reported in the two main judgments, namely Commissioner of Income Tax, Peshawar v. Gul Cooking Oil and Vegetable Ghee (Pvt.) Ltd. (2008 PTD 169 Supreme Court) and the case of Master Foam Pvt. Ltd. v. Government of Pakistan (PLD 2005 SC 373). Accordingly, it is necessary that we should set out our views in relation thereto. Prior to doing so, it is imperative to summarize concisely the principle of law which is applicable on the conceptual plane. The Department lacks the jurisdiction in relation to an activity taking place in PATA. It does, however, have jurisdiction to carry out an enquiry in the settled areas of Pakistan where the tax laws apply. Thus the initial burden of proof rests on the importer to establish that the goods are intended for PATA and once that has been discharged, the burden shifts to the Department to establish that a fraud has been committed and the goods have, in fact, been processed or sold in the areas where the tax does apply. Unless it discharges that burden, it cannot raise demands against the importers: This principle safeguards, the interests of both sides. 12. We now propose to discuss the case-law. Before that, however, we would like to express our appreciation for the judgment of the Peshawar High Court (authored by Yahya Afridi, J.) which has not only set out the factual and legal contentions raised by both parties but has also summarized the applicable case-law in the body of the judgment. This has saved us a great deal of time. 13. The Gul Cooking Oil's case (supra) went through three stages. The first was before the Peshawar High Court. The case pertained to a factory located in the Malakand Division and the question was about recovery of advance income tax at the stage of importation of the goods into Pakistan. The notices issued to the company by the Department under sections 56 and 61 of the Income Tax Ordinance were declared illegal and a direction was given that the raw material of the company should be released without deducting withholding tax at the import stage. The second stage was when an appeal was lodged before the Supreme Court. The judgment in this case is reported in (2003 PTD 1.913 = PLD 2003 SC 614), whereby the judgment of the High Court was maintained. This judgment was delivered on 25.4.2003. The final stage was when a review petition was filed and for purposes of disposal of the matter a larger bench of five members was constituted. This judgment is reported in 2008 PTD 169 and was strongly relied upon by the Department. 14. In our opinion, the judgment does not support the stance adopted by the Department in the present case. In the first place it should be noted that the judgment expressly accepts the legal position as stated by the High Court and as also stated hereinabove. This is so clear from the following extract of the judgment:--- "16. There is no cavil to the legal position that exemption under the law from payment of income tax is available to a person or company carrying its business in tribal areas and income tax cannot be collected from such person or company by the tax collecting authorities of the Government unless the law relating to the collection of income tax is extended to the tribal areas by virtue of Article 247 of the Constitution. Secondly, the judgment goes on to state what it considered to be the real question which was to be decided in that case. The following extract indicates the said question:-- 16. The exemption from payment of tax is certainly available on the business being carried in the tribal area in which income tax law is not applicable but the real question for determination in the present case would be that a company with its manufacturing unit and registered office ',in non- taxable area, if is also carrying business in taxable area, is exempted from payment of Income Tax of its income as a whole or only on the income being derived from the non-taxable areas."
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[Emphasis supplied] In the above circumstances, the case was remanded to the Department to determine this question of fact. The findings on the legal aspect of the case were left-untouched. We may note, in passing, at this point, that the facts of the present case are different. As the sequence of the events which has been set out hereinabove makes clear, the business in the present case was being carried on exclusively in PATA where both the factory is located and also where the sales take place. This case therefore is of no help to the Department. 15.The second main case on which reliance is placed is Master Foam's case (supra). (We may note that the High Court judgment under appeal incorrectly identifies the Master Foam judgment as having been delivered by a five members Bench. It was in fact a three members Bench.) 16.The facts of Master Foam's case are clearly distinguishable since in that case the business was being carried on in Azad Jammu & Kashmir (AJK) which is, of course, technically an -independent state with its own laws which is partially administered by Pakistan (as per Article 31(3) of the Azad Jammu and Kashmir Interim Constitution Act, 1974). The question in dispute related to the payment of sales tax at Karachi Port at the import stage. The demand was made in terms of Section 3(1)(b) of the Sales Tax Act. At this -point of time it is necessary to refer to a significant feature of the laws of AJK. In terms of the Sales Tax (Adoption) Act, 1993 (Sales Tax (Adoption) Act) -it is provided in terms of Section 2(4) as follows:--- "In determining the input tax under sub-section (I) the amount paid as input tax at the import stage to the Customs authority in Pakistan shall be 'deemed to have been paid in Azad Jammu and Kashmir for the purpose of adjustment against the tax liability on the finished goods." In our opinion there can be little doubt about the fact that this provision of law is both significant and detrimental to the case pleaded on behalf of the company. The grievance being made was that sales tax should not be charged on the goods since they were merely in transit through Pakistan. However, the feature which now emerges is that since the goods were intended for AJK the consequence of the above Section 2(4) is that the amount paid to the Pakistan Customs would be deemed to have been paid to the AJK Government under the Sales Tax Act applicable therein. It would seem to follow that the company would not have a genuine cause of action in relation to the levy of the sales tax in Pakistan since in fact that' tax" would be deemed to have been paid to the AJK Government. Admittedly, the company was subject to the jurisdiction of the AJK Government and the provisions of the Sales Tax (Adoption) Act applied to it. The question as to whether or not the company would be entitled or able to claim a refund from the AJK Government relates only incidentally to Pakistan. The Company relied on an exemption notification issued by the AJK Government and contended that it would be nullified if sales tax were levied on its goods by the Government of Pakistan. However, this by no means follows as a logical consequence. In fact, the finding on this point in the judgment is to the contrary: "The appellants have been granted sales tax exemption in AJK on the goods manufactured by them there. There is no exemption on import of raw material. In other words, they have been granted exemption only on the value addition they made to the raw material." Thus theoretically it was possible for the matter to have been decided on this point. However, the reasoning in the judgment traverses much wider field of enquiry. It relates to legal issues as well as to the question of Constitutional interpretation. 17. The legal issue which was primarily raised on behalf of the company was as to the true meaning of the word "import". Does the word import mean simply the passing of the goods into the territories of Pakistan i,e, by crossing the frontier, or, does it has a more extended meaning as was contended on behalf of the company i,e, that import means not merely the physical crossing of the goods but the entire legal procedure of importation including compliance with all the requisite formalities and excludes goods in transit. The specific contention which was raised was that goods which are in transit should not be considered as having been imported into Pakistan. After considering the
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matter in some depth, eventually the Court rejected the contention. Instead of giving a wider meaning to the term import it relied on the narrower interpretation in terms of which import merely means the bringing of the goods into the country. For this purpose reliance was placed on an earlier decision of this Court reported as Pakistan Textile Mills Owners Association, Karachi v. Administrator of Karachi (PLD 1963 SC 137). A number of decisions from the Indian jurisdiction were also considered and the contention raised on behalf of the company was rejected. The case-law emanating from the United States was also taken into consideration while doing so. In our opinion the decision taken as to the meaning and concept of import in the Master Foam's case is correct and is to be followed. However, this does not end the matter. The Court then decided to embark upon the wider constitutional issue which…
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